Greetings, and welcome to the Simon Property Group First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded.

Thank you, Camilla, and thank you all for joining us this evening. Presenting on today's call are David Simon, Chairman, Chief Executive Officer and President; 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 1 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 1 question.

Good evening. We had a strong start to the year with results that surpassed our expectations. In the first quarter, our funds from operations reached $1.33 billion, or $3.56 per share, compared to $1.03 billion, or $2.74 per share, from the previous year. I want to highlight some key details from this quarter in comparison to Q1 of 2023. Our domestic operations performed exceptionally well, contributing $0.09 of growth due to increased rental income. Investment gains in the first quarter were roughly $0.75 higher year-over-year. Our OPI contribution was $0.02 lower after-tax compared to last year. Funds from operations from our real estate sector amounted to $2.91 per share this quarter, up from $2.82 in the same period last year, reflecting a growth rate of 3.2%. Domestic property NOI rose 3.7% year-over-year, demonstrating our sustained leasing momentum. Strong consumer spending and operational performance led to these results, which were better than our initial projections for the first quarter. The overall portfolio NOI, including our international properties at constant currency, increased by 3.9% for the quarter. It’s worth noting that the NOI from OPI for this quarter includes a $33 million one-time restructuring charge from SPARC and JCPenney. Excluding these one-time charges and a bargain purchase gain from the Reebok deal last year, OPI's NOI improved by $5 million year-over-year and met our expectations for the quarter. As a reminder, these retailers operate on a fiscal year-end of January 31, and the charges were part of their year-end closing, not part of our budget. Mall occupancy at the end of the first quarter was 95.5%, which is an increase of 110 basis points from the previous year, while Mills occupancy stood at 97.7%. The average base rent for our malls and outlets rose by 3% year-over-year, with The Mills seeing a 3.8% increase. Leasing momentum remains strong, as we signed over 1,300 leases for around 6.3 million square feet, with new deals accounting for about 25% of our leasing activities in the first quarter. We are nearly 65% done with our 24 lease expirations and continue to see robust demand from retailers. Retail sales volume across our portfolio was up by 2.3% in the first quarter compared to last year, with our tourist-oriented properties outperforming the portfolio average, showing a 6% increase in sales. The reported retail sales per square foot for our outlets and malls combined was $745, unchanged year-over-year when excluding two retailers. Our premium outlet platform reached a record high for retail sales per square foot this quarter. Occupancy costs at the end of the first quarter were 12.6%. Now let’s discuss our other platform investments, referred to as OPI. We sold our remaining stake in Authentic Brands Group during the first quarter for nearly $1.2 billion, which resulted in a pre-tax gain of $415 million and an after-tax gain of $311 million. The total gross proceeds from both this sale and a prior one in the fourth quarter amounted to $1.45 billion. We realized substantial value from the ABG investment, achieving a 7x return on our net invested capital during our brief ownership period. Due to the ABG sale and the previously mentioned one-time restructuring charges at SPARC and JCPenney, we now anticipate that the FFO contribution from OPI will be close to breakeven this year, adjusted from our initial guidance of $0.10 to $0.15 per share. For context, we had budgeted the FFO from ABG at about $0.08 per share, so nearly half of that was linked to ABG. Moving on to our new development and redevelopment efforts, we have opened an AC Hotel at St. Johns Center and plan to open the Tulsa Premium Outlets this summer. Leasing activities are going very well, and we are also expanding at Busan Premium Outlets in South Korea this fall. At the end of the quarter, we had new development and redevelopment projects in progress across our U.S. and international platforms, amounting to net costs of $930 million with a blended yield of 8%. We expect to initiate construction on additional projects soon, including a residential project at Northgate Station in Seattle. Interestingly, we are positioned to build while others face challenges in the construction lending market, which is currently quite difficult. We forecast our project starts to be around $500 million this year. Regarding our balance sheet, we paid off $600 million of senior notes in the quarter, and we finished with approximately $11.2 billion in liquidity. Today, we declared a dividend of $2 per share for the second quarter, marking an 8.1% increase year-over-year. The dividend will be distributed on June 28. Given the transactions and results of this quarter, we are raising our full-year guidance range for 2024 to between $12.75 and $12.90 per share, up from last year's $12.51. This is a $0.90 increase at the low end and an $0.85 increase at the midpoint of the range. Overall, I am very pleased with our first-quarter results, and the demand from our business and tenants continues to be strong. Even amidst a challenging macroeconomic environment, our occupancy rates are rising and property NOI is expanding. We enjoyed significant profits from our ABG investment, and everything is heading in the right direction. Thank you. We are now ready for questions.

Our first question comes from Caitlin Burrows with Goldman Sachs.

Congrats on the solid quarter operationally and execution on the ABG sale. I guess there have been news reports that you could get involved in Express. So whether it's related to Express that's Simon's strategy going forward, can you give some insight to your current thinking on having ownership in brands, what type of terms are attractive to you and how you balance that with the potential earnings volatility?

No one likes earnings volatility unless it's in a favorable direction. Thank you, Caitlin, for your comments. I share your dislike for volatility. Regarding Express, we were approached by the IP owner, which isn't overly complicated. They recognized our past successes with ABG and SPARC and invited us to participate with no capital involved, while also leveraging our expertise from our previous work with SPARC. We have always valued Express as a retailer and a client, which is why we eagerly accepted the opportunity. We expect the process to go through bankruptcy, which is beyond our control. However, if WHP acquires it, we would be glad to contribute to the turnaround of Express without any capital investment from our side. When such opportunities arise, we carefully assess the brand and its value. In this case, we feel confident in Express as a strong company and brand where we can make a positive impact. Our aim is to help turn around retailers, save jobs, and create value from our investments, viewing it as a mutually beneficial situation with no capital requirement from us.

Our next question comes from the line of Jeff Spector with Bank of America.

This is Lizzy Doykan standing in for Jeff. I was wondering if you could elaborate on the main factors influencing retailer sales at the beginning of the year. It appears that your tourism-driven centers have performed particularly well. I would like to know how significant this has been in the first quarter and what potential there is for further growth from tourism.

We are very optimistic about our portfolio overall. Our tourist centers, particularly in California and the Northeast, are beginning to see improvements similar to what we've experienced in Florida, which remains an exceptionally strong market. It's encouraging to see California and the Northeast gaining traction. Although the strong dollar against some currencies presents challenges, domestic tourism continues to perform well. People enjoy shopping, dining, and spending time with their families while on vacation. The mall experience has made a significant comeback, and physical stores are thriving, indicating a resurgence in that sector. However, lower-income consumers have faced challenges for some time, largely due to the impacts of inflation. Even though inflation is easing, the prices they face remain quite high. We expect continued volatility in this segment and hope for improvements in their cost of living or wage growth to increase their discretionary income. In contrast, higher-income consumers are still spending and visiting our properties, which is positive. For instance, our traffic for the first quarter was approximately 2% higher compared to last year.

Yes.

So that's also a very good sign.

And our next question comes from the line of Samir Khanal with Evercore.

David, Brian, you provided a same-store guide of at least 3% last quarter. I guess, how do you feel about that guide today? You're doing 3.7% in the first quarter. Clearly, leasing has been strong, but we've also seen some announcements from Express, Route 21. I guess how do you feel about that guide today?

We don’t provide updates on that as you might know. Our goal for the year remains unchanged. We don’t revise it every quarter like some others do. Although we have encountered some unanticipated challenges, we have set targets for our rental income from retailers that may face pressure this year. Therefore, we are making adjustments in our budgeting process to address those issues. However, we believe our initial guidance is still very achievable. If we were uncertain about meeting it, we would communicate that. Despite some challenges, we still expect to deliver on our initial guidance, even if we may not exceed it as much as we hope.

Our next question comes from the line of Ronald Kamdem with Morgan Stanley.

Great. Just a quick one on the $500 million development starts, if you could just talk about sort of the opportunities there? And do you sort of still see opportunities to go on offense on sort of the mall space given that fundamentals are coming back and that there are going to be peers looking to sell assets? Are there opportunities and appetite to go on offense on sort of buying more assets?

I believe we've seen rates stabilize recently after a period of volatility that made predictions difficult. While we don't expect rates to decrease, we feel the current environment is stable, which simplifies investment decisions. I would categorize our focus into two areas. The first is our redevelopment initiatives, primarily involving mixed-use properties, where we are very optimistic. It's important to note that the development process typically spans 2 to 3 years, during which we expect minimal new supply. Our understanding of supply and demand is strong, and we know that superior products tend to prevail. Consequently, we will continue our mixed-use development and are also moving forward with multifamily projects, including one in Brea, Orange County, and another at Northgate Station, where we've recently signed our GMP to develop around 300 units as part of that redevelopment. This aspect remains strong for us. Looking at external opportunities, we see many prospects ahead and our task is to prioritize them, ensure we're appropriately valuing these opportunities, and maintain our focus on our existing portfolio. In summary, we may discover more external opportunities, but they must meet our criteria for quality at a reasonable price and have the potential for cash flow growth through our expertise.

Our next question comes from the line of Michael Goldsmith with UBS.

David, you mentioned the strength of the consumer, suggesting they are managing well in the current environment. Considering your positioning, occupancy gains, and pricing power, how do you think you could navigate a potential macroeconomic slowdown? In other words, has the business become somewhat less sensitive to macro factors due to consolidation, positioning you as a key player in reaching consumers in the luxury segment?

Sure, we are not unaffected by the macro environment and will need to address it, especially if it leads to reduced consumer spending and increased stress among retail clients. However, I believe we perform our best work when others struggle with the macro conditions. We have $11 billion of liquidity, which positions us well. It is realistic to expect a slowdown, and that’s typically when we excel. While others might tire and give up, we find renewed motivation. Having been in this business for 30 years, I see we thrive during challenging times. I’m not wishing for difficult conditions, but it's a likely scenario. We won't be immune to it, but I'm confident that we will distinguish ourselves further from our competitors if that occurs.

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

David, I just want to go back to Caitlin's question. In response to the retailers, you said that it brings a lot of volatility. Obviously, we all like volatility in the right way. But you can't deny that you guys have made a ton. I guess I could use a French word to describe the ton, but you guys have made a ton of money, billions from these retailer investments. Yes, they are volatile, but they've been lucrative. So I just want to get a better sense, is the express model sort of a future where you guys will participate if you put in no capital? Or just trying to understand how you weigh the money that you've made versus the short-term or the quarterly earnings volatility because clearly, it's been a source of success for you.

That's an interesting question, Alex. We really focus on understanding how fresh capital impacts our overall business while being driven by return on investment, similar to the process of building a new shopping center. Yes, we experience some volatility, but in the grand scheme of things, and considering that we've generated profits, I believe most people recognize that this volatility is limited. For example, with ABG, we generated $1.450 billion in cash, which resulted in about $0.08 of earnings since we only received our share of net income. As shareholders, we only received tax distributions of $2 million a quarter, totaling $8 million. If this $1.450 billion was instead invested in a bank at 5.5%, it would yield $70 million. Therefore, we compare all angles, both pre-tax and post-tax, and analyze what it contributes to our portfolio. While we don't desire volatility, we will accept it if we believe the investment is sound. We recognize that the market may not be enthusiastic, so we strive to approach these investments in a way that doesn't overshadow our overall strategy. Each investment is unique; for instance, if Express succeeds, it’s challenging to establish a new standard as each situation has its own characteristics. However, we believe we can do more than just lease spaces. We have operations in South Korea, Jakarta, and are developing projects in Tulsa and Seattle. I feel we have a broader perspective than the market often acknowledges, and we have improved our disclosures over time.

And that was the point that you guys have this special thing. It's sort of like Kimco has their retailer unique thing, and it would be a shame to do away with it if it was just volatility because clearly, it's made you a lot of cash.

Our next question comes from the line of Craig Mailman with Citi.

It's Nick Joseph here with Craig. David, I just wanted to ask about the opportunity to roll out additional luxury options, like VIP suites or retailers, similar to what you did at Woodbury. I'm curious about the potential for the rest of the portfolio and what kind of demand you anticipate from the higher income clientele you are targeting.

I believe we have an excellent portfolio of real estate aimed at high-income consumers, and we need to enhance our offerings for this demographic. Woodbury and Sawgrass are just the starting points in our efforts to truly engage and delight these consumers, providing them with the premium services they expect, such as fine dining and convenient access, along with an ideal mix of retailers. We have about 20 to 25 properties that require special attention, and our larger centers attract a diverse range of consumers, which helps manage fluctuations in demand. Our dedicated team is focused on these prime locations, where we often serve as a preferred landlord for top retailers worldwide. We are committed to maintaining this position. We aim to elevate our efforts for high-end consumers in various ways, and I expect the developments at Sawgrass, including the Oasis and The Colonnade, as well as those at Woodbury, to reflect this commitment. Similar enhancements will occur at our sites in Houston and King of Prussia. The improvements we made at Phipps in Atlanta and the ongoing projects in Boca Raton are just a few examples of our high priorities.

And our next question comes from the line of Floris Van Dijkum with Compass Point.

David, I was going to ask you about luxury, but instead, I'm going to ask you about capital recycling. Presumably, your guidance suggests that with the $1.2 billion from the ABG sale sitting as cash, you do have some ongoing development funded from your retained cash flow. So, is the guidance based on that cash remaining uninvested for the rest of the year, or is there potential for further upside if you were to reinvest that cash into higher-yielding investments?

Yes, that's a great question. In fact, we completed $1.450 billion in two months, as you know, Floris. I just wanted to point that out. Currently, our guidance assumes that it will either remain in the bank or be used to pay down debt. That's about it. There are no plans for redeployment reflected in our numbers at this time. Brian, do you have anything to add?

We have decided to keep the cash for now, as we have debt maturities due in September and October that we can use the cash to cover. Additionally, we still have cash from our capital markets activities from last year. This combination will help us manage our upcoming maturities.

Our next question comes from the line of Vince Tibone with Green Street.

Could you elaborate on the charges taken in the first quarter related to SPARC and JCPenney? And then possibly related to that, kind of what is your near-term outlook in terms of JCPenney store closures, just given foot traffic trends in recent years has not been great? So just curious how long you think the current store count and fleet is sustainable?

The pretax charges amounted to $33 million. It's somewhat amusing because typically, charges are in the hundreds of millions. When looking at this, it's important to consider the context. The main issues were related to personnel and inventory, with inventory being the larger concern due to the clearance efforts in SPARC which focused on F21 and JCPenney. We're satisfied with how JCPenney is performing. Regarding store closures, it's a fascinating situation. JCPenney can maintain positive EBITDA even without strong sales, and I believe they can benefit from opening new stores rather than closing them. While there might be a few closures, most of their stores generate positive EBITDA. They have a unique ability to achieve profitability from what I refer to as low-volume stores. This is particularly interesting as JCPenney is not a public company. Ultimately, what matters to me are cash flow and EBITDA. While comp sales are certainly significant, as long as we maintain profitability in our stores, there is no pressure from Wall Street to reduce the store count. I don’t subscribe to the idea of shrinking to grow; it’s generally very difficult to accomplish, regardless of the industry. Some may succeed, but if a store is generating positive EBITDA, there's no downside to keeping it open for the community. It’s essential to maintain operational standards, but if the store can generate cash flow, that doesn’t mean we have to heavily reinvest in it, allowing us to allocate resources elsewhere in the business. To summarize, I do not foresee significant real estate activity at the JCPenney level in the near future.

That's really helpful color. Maybe just as a quick follow-up on that. I'm just curious, given the ownership structure, I mean are you guys able to pursue recapturing some of these boxes at your best properties to unlock mixed-use development opportunities? Or how would that work given your foot ownership with Brookfield?

Yes. I think as part of the original deal, our relationship with Brookfield is strong, and we share a common vision for JCPenney and its operations. Both parties had the chance to reclaim certain spaces from JCPenney during the restructuring for redevelopment. We are preparing to announce a project where we will redevelop a JCPenney at one of our centers. I can’t recall the exact details about Brookfield, but during the bankruptcy process, we agreed to this right. When we take action, we notify the company as per our documentation, and in this case, it involves a lease cancellation with no payments required. The store is quite profitable for JCPenney, so we will need to offer them alternative opportunities. This scenario will likely occur a few times from both sides, and it was all previously agreed upon. If any situation wasn't covered in the agreement, our relationship with Brookfield allows for straightforward negotiations on value, with input from the JCPenney management team to determine the value for the redevelopment.

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

Just hoping to ask about the watchlist or bad debt. I believe you said you had assumed 25 basis points last quarter. Has that changed now at all? And if so, maybe if you could break out the Express impact. And in your prepared comments, you talked about sales on a per-square-foot basis being flat, stripping out 2 tenants. Just curious on the color of why those 2 tenants were stripped out, if there's any interesting development?

Yes, let me address that. Even if we didn't, it's just information for you to know that generally, the portfolio was flat. We prefer not to name tenants, so we don't emphasize that. The key metric we focus on is total volume, which was up quarter-over-quarter by 2.3%. That's the important figure. Keep in mind, these are reported sales. There are discussions around how some retailers credit their sales with internet returns, so it's just data for you to consider. Our sales, including the two retailers, were down 1.8% on a rolling 12-month basis, but overall, which includes non-comparable stores, was up 2.3%, which is the more significant number. Regarding our discussion, we won’t delve into specifics about any retailer. The bankruptcy of tenants involves various considerations, such as lease rejections, and this affects our comp NOI and bad debt expense. We feel it's still achievable. While we won't provide much detail on Express, we do account for unexpected circumstances in our annual business model, budgeting for retailers under pressure, aware that Express was in that situation. However, the outcome of Express's bankruptcy and its financial implications are still uncertain.

And our next question comes from the line of Haendel St. Juste with Mizuho.

I have two quick questions. First, I wanted to follow up on Floris' question regarding the use of cash from retail monetization. The stock is currently about $35 higher than what you bought it back for, so I assume it's reasonable to think that stock buybacks are less likely now. Are there any special dividends to be paid related to that situation? Secondly, we noticed that the TRG property count has decreased from 20 properties last quarter to 18. What caused that change?

I'll let Brian answer all these questions.

I can. With respect to TRG, there were 2 properties. One was a partner buying out our interest, so the property count went down by 2 in the quarter. With respect to...

Tell him the 2.

Fair Oaks and Country Club are the two assets involved when the partner is buying us out or has already bought us out. Regarding the capital on the balance sheet, it is clearly a capital allocation decision in relation to stock buybacks. Given the amount of capital we are generating, both in free cash flow and what's available on our balance sheet, using capital for buybacks remains appropriate for the remainder of the year, and we anticipate having an interest in repurchasing our stock at specific price points.

Yes. And I would just add to that, the ABG sale happened, I don't remember exactly, but near quarter end. And we were blacked out from that because of Q1 earnings. So I wouldn't read that the fact that it's sitting on the balance sheet to read too much into that.

Got it. Appreciate that. And the special dividend, anything on that front...

There is no required special dividend. This interest was owned in our taxable REIT subsidiaries, so there will be a tax payment due, not an actual special dividend.

Our next question comes from the line of Linda Tsai with Jefferies.

A 2-parter. I appreciate the fact that you won't provide capital to Express, but could you just give more color on how you would be providing assistance to the brand?

I believe there are a couple of key factors to consider. The first and most significant is our experience as a retailer emerging from bankruptcy. This has given us a unique expertise that our potential partner recognizes as valuable. I wouldn’t underestimate that aspect. Secondly, as part of any bankruptcy process, we will be engaging in lease negotiations. Some leases may be restructured while others may remain as they are, with some paying existing rents and so forth. This is a standard part of the bankruptcy process. We will evaluate each space individually, considering options like short-term leases, but we are not alone in this. Other landlords will also need to determine their approaches, especially if rent adjustments are required to stabilize the brand financially.

And do you have any clarity on the store closures at all, because one of your much smaller peers expects to close 65% of its stores in 2Q?

We are not involved in that process. That's really up to management. I have no perspective or opinion on it. We won't engage until we are approved as the stalking horse bidder. Everything happening today, including the depth and other aspects, is managed by the existing team. We have no role in that.

And our next question comes from the line of Mike Mueller with JPMorgan.

It's Hong on for Mike. I was wondering if you could provide an overview of the demand trends in your malls, particularly regarding the growth rates you're observing. Is the demand broad-based, and how much of it pertains to apparel compared to other categories?

Honestly, it's widespread across various sectors including restaurants, entertainment, athleisure, and sports-related businesses, particularly with larger retailers like UNIQLO, Primark, and Zara. I want to acknowledge Rick for his insights. We are witnessing Abercrombie exploring numerous opportunities with brands like Mango and Golden Goose, among others. Companies like KnitWell, JD Sports, Alo, and Lululemon are expanding significantly with us. Our House is a strong partner, along with Pinstripes and several restaurant operators. It's very encouraging to see such a diverse range of growth.

Got it. If I could sneak 1 other question. And I guess the $745 square foot sales, is that portfolio weighted or NOI weighted?

The $745 square foot sales figure is portfolio based. If it were based on NOI like we did previously, it would be approximately $950 higher.

$950 plus or minus, basically.

Our next question comes from the line of Greg McGinniss with Scotiabank.

David, just on looking at the volatility of the retail investments, what are the drivers to keep SPARC and JCPenney on the balance sheet as opposed to the ABG investments? And would you look to sell those in the near future?

They are equity accounted, so they don't appear on our balance sheet. They are investments in those companies. We created a situation where everything is core and nothing is core. We received an offer for ABG and accepted it. I see that as applicable to all our assets, whether it’s JCPenney, SPARC, or XYZ mall. Most people don’t meet my bid, but the only thing that is truly core is our company, its people, and its balance sheet. Everything else is up for sale at the right price, meaning nothing is fundamentally critical for the long term. Regarding volatility, it has primarily been on the upside. We are a company that earns $12, and we are discussing minor changes here or there. I want to put everything into perspective. There’s nothing I wouldn’t sell at the right price globally. Simply put, if we have the cash, we could easily find suitable investments to replace any lost earnings, or we could return the funds to shareholders or buy back our stock. My willingness to monetize an asset is at an all-time high.

We have reached the end of our question-and-answer session. And with that, I would like to turn the floor back over to Mr. David Simon for any closing comments.

Thank you for your patience. I know it's the end of earnings season, and we're always a bit late in Q1 since we align it with our annual meeting on Wednesday. I appreciate your interest and the insightful questions. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.