Greetings. Welcome to Simon Property Group's Second Quarter 2024 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 of Investor Relations. Thank you. You may begin.

Thank you, Sherry, and thank you, all, for joining us this evening. Presenting on today's call are David Simon, Chairman, Chief Executive Officer and President; and Brian McDade, Chief Financial Officer. A quick reminder that statements made during this call may contain 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 only be accurate 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 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, everyone. I'm pleased with our financial and operational performance in the second quarter. We are seeing increased leasing volumes, occupancy gains, shopper traffic, and retail sales volumes that resulted in the company's highest level of real estate NOI for the second quarter in our company's history. Demand for our space from a broad spectrum of tenants is strong and steady. Our company is focused on creating value through unique and disciplined investment activities that will continue to deliver long-term growth, cash flow, funds from operations, and dividends, as you have seen by our recent increase in our dividend per share. Importantly, we also aim to make our properties better for the communities in which they operate. I'm now going to turn the call over to Brian, who will cover our second quarter results and the full-year guidance in more detail.

Thank you, David. Second quarter funds from operations were $1.09 billion or $2.90 per share compared to $1.800 billion or $2.88 per share last year. FFO from our real estate business was $2.93 per share in the second quarter compared to $2.81 in the prior year, reflecting a 4.3% growth. Domestic and international operations had a very good quarter and contributed $0.12 of growth. As a reminder, the prior year included a non-cash gain of $0.07 from investment activity related to ABG. Domestic NOI increased 5.2% year-over-year for the quarter. Continued leasing momentum, resilient consumer spending, and operational excellence delivered results exceeding our plan for the quarter. Portfolio NOI, which includes our international properties at constant currency, grew 4.8% for the quarter. Malls and outlet occupancy at the end of the second quarter was 95.6%, an increase of 90 basis points compared to the prior year. The mills occupancy was 98.2%. Average base minimum rent for malls and outlets increased 3% year-over-year, and the mills increased 3.9%. As David mentioned, leasing momentum continued across the portfolio. We signed more than 1,400 leases for approximately 4.8 million square feet in the quarter. Approximately 30% of our leasing activity in the second quarter was new deal volume. Our traffic in the second quarter was up 5% compared to last year. Importantly, total sales volumes increased by approximately 2% year-over-year. Reported retailer sales per square foot in the second quarter was $741 for the mall and premium outlets combined. We hosted our third Annual National Outlet Shopping Day in June, which was very successful for shoppers and for participating retailers. More than 3 million shoppers visited our premium outlets and mill centers over the shopping weekend, and feedback from shoppers and retailers following the event has been great. Since launching this unique event three years ago, participating retailer and shopping momentum has built each year with more than 475 retailers this year, and we look forward to an even bigger event next year. Our occupancy cost at the end of the second quarter was 12.7%. Turning to new development and redevelopment, we will open our Tulsa premium outlets on August 15th at 100% leased, and we will also open a significant expansion at Busan Premium Outlets in South Korea this fall. We also started construction in the quarter on our first phase of a new luxury residential development at Northgate Station. This project will include 234 units and add other elements that further transform Northgate into the ultimate live, work, skate, stay, and shop destination. At the end of the quarter, new development and redevelopment projects were underway across all platforms in the US and internationally, with our share of net cost of $1.1 billion and a blended yield of 8%. Now to the balance sheet, we completed the refinancing of 10 property mortgages during the first half of the year for a total of approximately $1.1 billion, at an average rate of 6.36%. We ended the quarter with approximately $11.2 billion of liquidity. Turning to the dividend, today we announced our dividend of $2.05 per share for the third quarter, a year-over-year increase of 7.9%. The dividend is payable on September 30th. Finally, for guidance, we are increasing our full-year 2024 guidance range to $12.80 to $12.90 per share compared to $12.51 last year. This is an increase of $0.05 at the bottom end of the range and $0.02 at the midpoint. It reflects overcoming approximately $0.15 per share from certain retailer restructurings, lower lease settlement, and land sales income this year. That concludes our prepared remarks. Thank you. David and I are now available for your questions.

Thank you. Our first question is from Jeff Spector with Bank of America. Please proceed.

Great. Good afternoon and congratulations on the quarter.

Thank you, Jeff.

Yes. My first question is about the consumer. Given that you serve consumers in various formats from malls to premium outlets to mills, what are your current thoughts on the consumer today? There seems to be concern in the market that we might experience a consumer-led recession. Could you also discuss what you're observing from retailers and their current actions? Thank you.

Sure, Jeff. This is David. I'll take that. So look, I think we've been pretty consistent for well over a year that the lower-income consumer has been under pressure for quite some time, primarily because of the inflation that's affected them. That continues to be the case, they are very focused on managing their bills, and discretionary expenditures have been obviously not where we'd like to see them. So we're optimistic that we're going to cycle out of that from the lower-end consumer, given the inflation picture that we see now, which is relatively benign. It's way too early, Jeff. We haven't seen a slowdown in the higher-end consumer. Obviously, the market is at an interesting point. We have not seen the wealth impact affect that higher-end consumer. So we're still pretty optimistic about it. I think, as you know, we budgeted at the beginning of the year for flat sales. We're a little bit above that, so we've got a little bit of cushion. But for the higher-end or better end-consumer, I think they are in a good spot. Liquidity is decent, so we don't expect anything dramatic. But obviously, they're going to take their cue from the overall market and what the employment picture looks like. In summary, I think we're going to see more positive movement in the lower-end consumer, and I think the higher-end consumer will remain steady.

No, thank you. That's all be respectful. Thank you.

Thanks, Jeff.

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

Hi, David. I guess what are you seeing in terms of leasing or pricing power? I mean, are you seeing any tenants taking a bit of a pause or taking a bit longer to sign new leases, given what's happened with the macro environment? Any color on July would also be helpful in terms of traffic or sales? Thanks.

Yes, I don't have color on July. We don't really get those numbers until August 20th, which is my birthday, by the way, but it's usually 20 days after the month, so no early returns on that. So we had a deal committee meeting, Brian, a week ago and what I am told, which I don't participate in because I would probably be disruptive, but what I am told, it was the best new deal committee we've had ever. I think what we're seeing is demand, and what I said earlier in my opening remarks, demand is strong and steady, not abating. It's really unabated. Obviously, retailers and we are all sensitive to economic conditions, so as those develop, we have to be sensitive to them. But as we currently speak, we had a great deal committee and the team is working on all cylinders. So that's the news from the front.

Thank you.

Sure.

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

Hi, everyone. Maybe just following up on that retailer demand side. So portfolio occupancy has increased nicely over the last year. It sounds like leasing remains strong. You just mentioned the best new deal committee, so that would support further occupancy increases. I'm just wondering versus the current 95.6%, how much further upside do you think you have? Or is there some reason to expect this rate of increase can or cannot continue going forward?

Hey, Caitlin, it is Brian. I think we're pretty comfortable thinking that we're going to end the year north of 96%. Certainly still a little bit of noise out there, but given the robust demand in the type of environment we're in, we think we're north of 96% by the end of the year.

I mean, again, yes.

I'm sorry, I was just going to add that obviously, it's also not just the occupancy number; it's also about replacing retailers that aren't performing with better retailers. So it's a mix issue too, which the team is very much focused on. Go ahead, Caitlin.

Yes, I was just going to say bigger picture, like, Brian, you just mentioned north of 96, is there any reason to think maybe based on what David said, that's kind of a ceiling, or is there still potential for continued upside?

I'd be cautious, but that's a pretty good number for us at year-end. Tom knows every detail, but he's not here. It's a significant increase from last year, 95.5. It's not that impressive, so there might be room for improvement.

Okay. Thank you.

Yes. Thanks.

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

Hey, good afternoon. And David, certainly good to hear you on the call. Hope the recovery and all the stuff is going well. Just a question for you big picture. Jeff kicked it off and a number of my peers have all asked the same question. But as we look at the environment today, certainly there's a lot less retail availability. There's been a big shake-up not only among the retailers themselves, but also the landlords and certainly cost for new development has gone through the roof. So as you look at the picture today, with the economic concerns, but at the same time that the tenants seem to be in better capital positions. Are you as worried today when you see weak economic data? And does that impact how you think about expanding, putting money to work, and how the leasing conversations are going? Or do you think that we're in a better situation or worse situation? Like how do you judge where we are now given that the environment seems to be different than it has been over the past few decades?

Thank you, Alex, for your insights. In response to your question, I genuinely believe that we are better positioned than ever. Even with the current uncertainty and the possibility of a recession, which no one wants to face, I see our position as strong. If a downturn does occur, the difference between us and our competitors will only widen. Comparing where we started three years ago to our current standing, the gap is considerable and will continue to expand, highlighting the effectiveness of our team. I don't see a potential recession or challenging market as a reason to hold back; instead, we have just broken ground on 234 units at Northgate and plan to initiate another phase in about nine months based on pricing outcomes. From our perspective, we are not slowing down. If the economy experiences a dramatic slowdown, the disparity between us and others will grow, presenting us with opportunities for exciting projects.

And you see the same confidence from your retailer, from your partners, your tenants, or are they waffling?

I think the better retailers, we have several retailers that are in strong financial standing, and I think they take a longer view just like we do. Not everyone, but I would tell you that the majority of who we're doing new business with is definitely taking a longer-term view. They are looking to gain sales and market share as well. We are certainly not on the defensive in light of the turmoil over the last few weeks. If anything, we'll step up our investment activity, but not foolishly, meaning we will do it like we do everything else, but we don't see it as a reason to pull back at this point.

Thank you.

Sure.

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

Good afternoon. Thanks a lot for taking my question. You continue to drive nice NOI growth driven by both occupancy gains and higher rents. Now we've talked a little bit on the call about occupancy potentially approaching a ceiling. So do you see increasing pricing power with that to maybe offset that? I'm just trying to get a better understand of how the algorithm kind of looks in the coming quarters? Thanks.

Well, again, occupancy is like any statistic people want. And to be clear, we do think we'll increase our occupancy. The bigger opportunity for us is to continue to enhance our mix. And that drives, obviously, the better the mix, the higher the sales; the higher the sales, the more likely that you're going to have higher rents. So that is the main focus as we continue to merchandise our properties. Brian, I don't know if you want to add anything here.

Yes, Michael. We continue to see pricing power. Roughly rents are similar to last year where we've seen an escalation in new deal rents in the 70s. That's continuing, and as we find more retailers and update the mix to drive demand, it ultimately leads to our pricing power. So there is a recurring premier relative to that.

Thank you very much. Good luck in the back half.

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

Hey, guys. Maybe shifting gears a bit onto the balance sheet and just the rate environment here. Just your thoughts generally with a three, eight, 10 year. If that's at all changing your view on kind of the upcoming debt maturities in the back-half of the year and how to fund those versus how much cash to keep on hand. David, maybe your commentary about the gap between you and others, and your ability to be on the offensive to make investments now that if we do go into recession by the time they're done, you're kind of on the other side of it and you're well-positioned. So I'm just kind of curious, I know it's a broader question, but just how the softening rate environment here does that change anything you're doing or how you want to be positioned on the margin?

Craig, it's Brian. Look, one day doesn't really change our financing plans for the year. We're sitting on $3.1 billion of cash. We had $1.9 billion in maturities in the back half of the year. Our current plan is still to refinance those out with cash on hand. But to the extent we were to see opportunities to do otherwise, or if the market opens up with tight spreads, we can certainly access the market in the back half of the year as well. But no current plans to do so at present.

Yes. And I would just say, look, we have $11 billion of liquidity, so a lower interest-rate environment increases our earnings potential. There are various benefits associated with a lower interest-rate environment, but by and large, that's beneficial to real estate. So if rates go lower, it will be better than what we had initially planned for this year and next year. That's positive news in a nutshell. But again, remember, we're not living mortgage to mortgage; we are a different kind of company. So we don't face the risk of not being able to refinance. But by and large, if rates go lower, that is better for this company.

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

Thanks for the time. And David, I hope your recovery is going well. I'm just curious on the investment front. You clearly sound more bullish or wanting to invest more capital in debt and re-debt. But just curious about external acquisitions with the statement that you said that you're only going to kind of widen the gap between yourself and others. Would that make you want to wait because there's going to be a better maybe spread down the road between your performance and those of others or not necessarily?

Well, it's a good question, and judgment certainly comes into play. As you know, we haven't completed any external acquisitions for quite some time; we will look at quality opportunities where we can add value at appropriate pricing. Up until now, we frankly haven't found any. That doesn’t mean we're discouraged, we will keep looking, because it is an element of what this company excels at. We would like to add quality at the right price, and if we can't get it, we have sufficient activities to maintain liquidity and focus on our strategy.

Thank you.

Sure.

Our next question is from Ronald Kamdem with Morgan Stanley. Please proceed.

Great. Best wishes to you, David, as well Mike. Just a quick one from me. Could we double-click on some of the strength that you talked about in the portfolio, but maybe breaking it down between malls versus outlets or some of the tourist centers would be helpful.

Well, Ron, I think you're seeing broad-based demand across all of our platforms. It's difficult to give you an individual snapshot, but we see a strong over-index in our outlet business particularly in international locations which remains strong for us. That is a driving factor in our outlet business results. Retailers are conducting business across all three formats. You're seeing the highest occupancy ever, so demand is broad-based from all retailers.

Yes. It's interesting. I just don't think there’s a unique trend. It's not a case of Florida or Texas, outlets versus malls; it's really property-specific. The quality of good properties is improving. Traffic, which is a good indicator, was pretty consistent across the board. So I really think it’s property-specific. There isn’t one singular trend to focus on, at least in this quarter. You might get a better perspective by year-end.

Great. Thank you.

Sure.

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

Hi, thank you. And David, I wanted to wish you a speedy recovery. My question tonight is about the strong and broad-based demand you mentioned you're seeing for space across the portfolio. I was hoping you could provide a bit more color on the size of the backlog of leases that are coming online, maybe some color on the timing of that? And is there also any update you can provide on the 3% domestic NOI growth from last quarter for the core? Thanks.

Hey, Haendel, it's Brian. Regarding demand, we have a signed but not open pipeline of about 300 basis points. You heard David talk about the mix; we are moving some tenants around, so that’s not all additive. There will be some coming out from the bottom. That demonstrates the breadth of demand for space. Regarding 3% domestic NOI growth, we don’t provide updates as we go. We established our goals at the beginning of the year, and we're working hard to exceed those numbers.

Got it. Thank you.

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

Hi, good evening. How much do you think changes in the stock market impact consumer spending at the higher-end? Just from your experience over the years, at what point does stock market volatility really start impacting consumer behavior and consumer sales?

I wish I had an algorithm to predict this, but I believe AI could assist us. Historically, short-term market fluctuations have little significance. However, over six to nine months in a declining market, we often see a decrease in consumer spending. While short-term volatility may not have an immediate effect, a prolonged downturn could result in reduced consumer spending. Consumers are accustomed to some market fluctuations and have gains they didn't expect. Therefore, if these conditions persist, we are still in a solid position. If there is a significant downturn, it's reasonable to anticipate some reduction in consumer spending. However, this could be balanced by low inflation and decreasing interest rates.

It makes sense. If I could ask one quick follow-up along those lines: how should we think about the sensitivity of Simon's cash flows to tenant sales? With all the changes from COVID, it seems like most of that has unwound at this point. Is there any guidepost you can share on how much rent or how much of your total revenue is made up of overtime percentage rent? How much volatility is there in your business from potential tenant sales declines?

I would say that overall, the situation is better than it was coming out of COVID, though still below the levels we experienced during that time. However, we expect it to be higher than what we saw before the pandemic. We can provide a more precise figure later.

We'll follow up offline, Vince.

Great. Appreciate the time. Thank you.

Thank you.

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

Hey, good afternoon. David, we share a birthday, so I'm pretty excited about that. My question, first.

How old are you going to be?

No, you really want me to share that?

No, no, no, not at all.

So we noticed that the overall same-store NOI growth this quarter was healthy, but largely driven by the consolidated portfolio. We had international NOI down 1% year-over-year, with JV revenues down about 4% versus last year. Is there anything impacting the international and JV assets this quarter? Do you expect to see those return to year-over-year growth in the back half?

Greg, from an international perspective, last year we recognized a one-time performance fee in our McArthurGlen business from third-party managed capital, so that did not repeat this year. That’s why you see a decline. This will normalize itself through operations moving forward.

Okay.

Yes. I would say our international assets, both in Asia and Europe, are generally performing on plan if not better. They reported solid results last week, and they are positioned well moving forward. The international market sees some variability, but overall, international segments show good NOI growth this year.

Okay, thank you very much.

Sure.

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

Hey, thanks. Glad to hear you're doing well, David. You sound great. My question is regarding Value Retail. I know you guys own a stake in that. It's sold at an incredibly low cap rate to Catterton, who I think is the investment arm of LVMH. Could you maybe talk about the cap rate environment in Europe versus here, and maybe also the long-term nature of some of these big luxury brands? Do you see them putting money to work at those cap rates? I mean, I guess they have already on Fifth Avenue, but in the mall business as well in your view?

Let me try to unpack that. First of all, L Catterton are very smart investors, and Value Retail is a unique structure. You can't look through their investment that was at a significant discount to NAV to get to a cap rate without intimate inside knowledge which neither you nor I possess. They are very smart investors. I don't think this is indicative of a broad trend. It really depends on the brand in question; whether it's luxury, higher-end, or moderate. Every retailer has different objectives and strategies. I don't expect L Catterton to suddenly invest heavily in retail real estate, but I could be mistaken. Each brand’s strategy differs distinctly.

And if I may follow up, how are your discussions going with your institutional partners here in the US in the mall business? Are they happy, and are there opportunities for you to buy some of them out, or are they fairly comfortable owning some of those top malls that you typically joint venture with?

Overall, we hope that our relationships with our institutional partners are strong. Again, it’s difficult to generalize. For the most part, partners are pleased and very happy to collaborate with us. There may be an asset here or there that doesn’t align with their long-term strategy, but generally speaking, it's business as usual with our institutional investors.

Thanks, David.

Sure.

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

Hi, good afternoon. On the 300 basis points of signed but not occupied, what does that represent in dollars? What's the timing of that coming online? And would you expect this to compress going into next year?

Linda, most of that is back-end weighted, there'll be a little bit this year. Most will manifest itself next year given how retailers typically position their store fleets to maximize openings before back-to-school holidays.

And would this signed but not occupied be down year-on-year at the end of next year from where you sit today?

It's difficult to predict what will change in 12 months. Right now, we have consistency, seeing an increase from around 200 basis points a year ago to 300 basis points currently.

Thanks. And what's that represent in dollars?

I don't have that number in front of me. That's typically not something we disclose since it involves annualizing and adding up all leases. But it's a significant figure.

Yes, that won’t be disclosed because it’s difficult to calculate accurately.

Great. Thank you.

Thank you.

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

Yes. Hi, David, we're glad you're on the call. My question is, TRG's year-over-year base rent growth looks like it was over 8% in the second quarter. Can you talk about what's driving that growth?

It's simply a mix of the deals that they're doing at the assets. They're securing some very favorable leasing at their better assets, which is reflected in the average rents for that time. Keep in mind, it's a much smaller portfolio than ours, so you see a more significant percentage jump.

Got it. Okay. Thank you.

Our next question is from Ki Bin Kim with Truist Securities. Please proceed.

Thank you, and good to see you sounding better, David. So just curious, if there were a consumer downturn, could you discuss how your portfolio might perform today versus a few years ago? I realize the tenancy might have changed significantly over the years towards less apparel, more services, restaurants, or other uses. I'm trying to understand this from a sales sensitivity and a credit sensitivity standpoint.

Yes, sure. I'll take a shot at it. Historically, in recessionary times, our NOI cash flow tends to flatten out. It's difficult to give exact numbers without knowing the specifics of the recession. I feel that our cash-flow from the properties tends to hold steady. Thus far, we haven't seen significant declines, just flat performance.

Okay, thank you, David.

Sure.

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

Hi, again. This has been a very efficient call. I guess maybe on retailer bankruptcies: Express and Rue 21 were retailer bankruptcies of 2024, and I'm guessing you have had exposure from a rent perspective to additional smaller ones also that maybe aren't as obvious. So could you comment on how the outcomes of the 2024 bankruptcies on Simon's financials have ended up versus your expectations, and then give a broader update on the current watchlist?

Well, I'll just confirm what Brian stated earlier; we have certainly had an impact from the retailer restructurings. Also, we have slightly lower lease income and a little lower land sales than initially budgeted. These combined impact your new guidance by approximately $0.15 that we anticipated would be there but aren’t. We factored in the restructuring for Express and Rue 21.

The watch list continues to remain fairly static. Events we anticipated are playing out, and we do not have new entities added to the watch list at this juncture.

Got it. And then maybe one more if I could. Just the contribution to the portfolio from the retailers. I think your latest comment was for a flat contribution in 2024. Just curious if there's an update to that and your confidence in the back half of the year.

Well, I think we’re still evaluating the numbers; our portfolio reflects approximately $200 million in EBITDA in that kind of OPI bucket now that APG has exited. It's likely a marginal amount in terms of cents here or there. The brands Sparc represents will continue to struggle in the lower-income segment. However, the team at Sparc is actively working hard, and their recent acquisitions are performing well. It remains competitive out there.

Okay. Thanks.

Thank you.

Thank you.

I think this wraps it up. Let me just say to everybody, thank you. I got a lot of well wishes during this tough time for me, and I am working on it and appreciate all your support. We will talk in the near future. Thank you.

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