Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Simon Property Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. And now, I’d like to introduce your host for today’s program, Tom Ward, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Jonathan and thank you all 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. Before we begin, a quick reminder that statements made during this call may deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today’s press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today’s date. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today’s Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. For those who would like to participate in the question-and-answer session, we ask that you to please respect our request to limit yourself to one question and one follow-up question, so you might allow everyone with interest the opportunity to participate. For our prepared remarks, I’m pleased to introduce David Simon.

Good evening and thank you for joining us today. Our results this quarter reflect continued progress in tenant reopenings and rent collections. All of our U.S. retail properties are currently open with nearly 25,000 tenants across our portfolio open and operating, and welcoming shoppers to this year’s extended holiday shopping season. Collections from our U.S. retail portfolio have continued to improve. As of November 6, we have collected 85% of third quarter net build rents. Second quarter collections are now 72% and including the deferred amounts in the calculation, the second quarter collection rate increases to 78%. The details of our collection percentages are clearly laid out in our press release issued this evening. While we’ve made significant progress in addressing collections, we still have some unresolved amounts with certain larger national tenants, who unfortunately are refusing to pay their contractual rent even though they are open and operating. Let me turn to our results. Third quarter reported FFO was $723 million or $2.05 per share. I am pleased with the solid profitability of the quarter and $600 million in cash flow we generated for the third quarter. Our domestic and international operations in the quarter, however, were negatively impacted by approximately $1.10 per diluted share primarily due to reduced lease income, including sales base rents or ancillary property revenues caused by the COVID-19 disruption partially offset by $0.23 per share from cost reduction initiatives or a net $0.87 per diluted share and then another $0.05 from our international operations as well. And the third quarter also includes our FFO $0.10 per share of lower straight line rent and $0.06 and the litigation expenses and $0.01 lower lease settlement income compared to Q3 of 2019. Now, like I did last quarter for Q2, let me walk through the components of…

[Operator Instructions] Our first question comes from the line of Craig Schmidt from bank of America. Your question, please.

Great, thank you. I guess, given the acceleration of COVID cases and the possibility of future mandated closings, I wonder if you’re seeing greater consistency concerning store opening orders or store closing orders from state and local governments, particularly with the regards to the demands made on standalone retailers versus mall operated properties?

Well, the only situation that we have right now is in El Paso, where an enclosed mall is been asked to essentially shut down, that is of recent, that happened over the weekend. Again, I think enclosed malls are being treated unfairly and inconsistently, but we deal with what we deal with right now. That’s the only one Craig, we’re hopeful that that will reopen. And listen, I think the consumer obviously is cautious. Our quarter-over-quarter sales decrease is only 10%. So, the consumer is starting to come back. They’re wearing masks and with all our protocols, we’re – we’re hopeful that – that trend will continue, but there’s certainly no guarantees. And as far as predicting the government and state and local actions, I mean obviously, the level of inconsistency, it’s been very frustrating. It’s been state-by-state, city-by-city, county-by-county. It is a testament and often on look – often overlook that enable to deal with this as well as we have, and we’ve done it, when I’ve asked people to take pay cuts, and they’ve done it. They’ve shown up to work every day. You’ve seen the collection – the improvement in collections. I think we’re making basically all the right moves and – but we can only deal with what we can deal with. I have no – I don’t know if further restrictions will be in order, we have yet to see any evidence that our environment spreads anything. obviously, the outlets and outdoor centers are doing better. But as you know, we have 50% of our portfolio NOI dedicated to that. That’s kind of why I think you see our performance the way it is, and the one line item that’s up, if you looked at our financials, is real estate taxes, when are local jurisdictions going to start giving relief to retail real estate taxes, compared to distribution warehouses and the like. It’s completely opposite. We do more for the communities than other property types and I am hopeful that at one point in the near future that that they – these communities will recognize it.

Great. And then just as a follow-up, we’ve noticed the store closing cadence has slowed since Labor Day. I’m wondering if the occupancy number in 3Q 2020 could be the trough, or do you still expect maybe some lower occupancy in first quarter 2021?

Well, I think it’ll – that’ll be a function of whether we have further bankruptcies or not, Craig. I think based on what it is, we should be fine, but I mean, it is possible that we’ll have further bankruptcies and we’ll have to – when that happens, obviously, we’ll deal with that. But there’s certainly some bankruptcies that are potential out there in the next few months.

Okay. Thank you.

Sure.

Thank you. Our next question comes from the line of rich Hill from Morgan Stanley. Your question please.

Hey, good evening, David. Thanks for taking my question. first of all, thank you very much for the transparency on the bridge to rent collections. I think that’s top-notch and best-in-class. So, thank you for doing it. I want to ask a strategy question and maybe, think about your portfolio. One of the things I think is misunderstood about Simon is that you’re not – you own a diversified portfolio of retail real estate across property types in the quality spectrum. So, I’m curious as you think about your portfolio on the other side of COVID-19, or do you like, are you comfortable with having, call it 46% to 49% of your total NOI coming from malls? Do you like – do you want less, do you want more outlets? Do you want more international? I’m just really curious about how you think about your portfolio, maybe over the next decade.

Listen, I think the – we’re a strong believer in the outlet business, as you know and especially, with retailers and brands moving more and more toward direct to consumer. And so I think that plays well into that and obviously, the outdoor environment continues to be an advantage certainly with the COVID [indiscernible] much part of our lives. So, I like where we are. I think, over time our portfolio, non-core assets will be shed, usually those don’t have a material impact on our NOI or cash flow. And so I kind of like where we are – we’ll probably shed some more properties. I think international is intriguing now. There’s value that we’ve added, the outlet business there that we have is very good. The outlet business in Asia is strong. So, we’re going to want to grow that, but I feel kind of like the diversity by region, by product type and by – certainly, by domestic versus international. So, our international results were pretty good. They were down though; we had some new properties open up and some expansion. So, it’s hard to see that, but the core number was down a little bit, but they came back pretty strong. Obviously, there’s a big wave going on now in Europe. So, they’re starting some more restrictions, but I think the direct to consumer from the brands is really important and I think that plays well in the outlet business. by the way, it’s helping shop premium outlets. It’s been an hour and a half with my partners, both at Rue La La, Gilt and the kinetic folks going through a [indiscernible] that want to be hooked up. So, this vision that we had is actually going to come to fruition, I hope, knock on wood. So, I like where we are. But we’re always looking at quality real estate and I look at the quality more – quality is more important than potentially, the property type and I think that’s the big focus and there’s going to be obsolescent retail real estate. And so I think owning the best of the best is going to be a key to our success in the future.

Yes. That’s really helpful, David. And the reason I was asking the question is just – it just seems to me that on this other COVID-19 world, whatever it is, that the retailer itself is probably, like you, agnostic, of the type and it’s just looking for the best quality. So, I’m curious is that beginning to resonate with retailers, as you think about – as they think about their footprint and how Simon Property Group can help fulfill those footprints, or is it still too early?

No, no, no, absolutely. And I would say that trend is happened completely. I mean we – in the mall – the mall is always competed with the guy across the streets for the retailers that competition still exists. It’s certainly only going to be exacerbated by what’s happened over the last six, seven, eight months and you’ve got to own quality, and it’s somewhat – today, it’s somewhat irrelevant whether it’s this kind of asset or that it’s really, doesn’t have critical mass. Is it well located? Does it serve the customer the way they want to be served?

Got it. Thanks, David. Look forward to chatting more.

Sure.

Thank you. Our next question comes from the line of Alexander Goldfarb from Piper Sandler. your question, please.

Hey, good evening. Good evening out there and handy. How’s that David?

We’re out – we’re definitely out here, man. Okay.

Well look, your center of the biotech and health world. So, we appreciate everything that the biotechs are doing.

Because when Lilly gets their vaccine, I hope, my team is first in line, just because we’re there across the street from us. Okay. So, we’ll see.

Excellent, excellent. So, two questions; first again, appreciate the breakout and actually, this provides clarity, so that people can see the collections on a net basis, or if you want to do collections on a gross basis, it’s helpful. You’d mentioned the abatements were basically expensed in the period granted. So, on a go-forward basis, as we think about fourth quarter and the ramp up, does this mean that, we should see fourth quarter earnings jumped by $200 million, or how should we think about the impact of the deferrals and the impact of the abatements on a go-forward, so that we can think about the progression of Simon. I’m not asking for guidance, but I’m just trying to get a ramp of how much kind of…

You’re asking for guidance cleverly. But I – listen, I would, everything is very still up in the air and obviously, we had – the worlds had this positive news today about the vaccine, but the fact is COVID is spiking. So, we have to be very serious that I would hope Alex. I mean, the big issue, the big thing that we’ve confronted aggressively in Q2 and Q3, and the way I look at it, frankly, there’s almost put those two quarters together, because you’re right in a – we took the P&L hit when we granted the abatement and that’s the right way to look at it, but I would think that the vast majority of any abatements are behind us. That’s though to be clear, that’s not to say that if there’s an appropriate trade with a retailer that’s a win-win for us, that we won’t do more. And what does that really mean? it’s new deals lease extent, it’s the normal stuff to do. But I would literally hope that the worst is behind us. But listen, I don’t know what the new COVID cases today was. I was a little busy, but I’m sure it’s well over 100,000. And I can’t guarantee that, but I would say between the credit provisions and the bankruptcies. I’m sorry – the credit provisions, including the bankruptcies are kind of all melded in that number and the abatements that we went out of our way to do, we weren’t legally required to do, but we did for people that were; one, on the local front, very sensitive to their plight; and two, there was a decent trade for us and the retailer, and we want them to prosper, frankly. I would hope that the vast majority of those two numbers, credit loss permissions, as well as abatements are behind us.

Okay. But David, as you said earlier, the abatements were largely your local tenants. So, they’ve either made it or they haven’t. So…

I said that majority of it, we did grant abatements to others. So, there’s other abatements that have been in there. I mean – but that, again, that’s a – it’s a pretty big number in terms of that we didn’t have to do. And like I said, I hope that it’s behind us. We’ll have more in the Q4, but what we’re projecting is a lot lower than what we’ve had in Q2 and Q3 together.

Okay. So, correct, so basically, you’ve taken the hard approach with both for all of the abatements in 2Q and 3Q. So hopefully, going forward is less. Okay. I got it. The second question, David is on the retailer front. Brooks Brothers, Lucky Brand, you did Aeropostale, Now you’re going to do J.C. Penney. You highlighted the sales; you highlighted this customer base, that’s loyal to the brand. What are – I mean, what are the elements without giving away totally the secret sauce? What are the elements that give you confidence when you look at trouble retailers and bankrupt ones, hey, what the core shopper for this brand is still there, despite that the retailers had trouble and is in bankruptcy, we feel that the core shopper is substantially still in place that we’ve – that we can recover. Because it’s certainly not just buying something cheap enough, anything can be cheap. there’s got to be something tangible that makes you feel like you can get these customers to really come back and do it in a profitable way. So, what is it that gives you that confidence?

Well first of all, we’re – we do, don’t underestimating buying things cheap. Okay, Alex. So, that’s always, it’s always good to do that regardless. Listen, I just think based on the sales that we’re seeing from the brands, we do a lot of brand research and then we attacked the problems with the profitability, given I won’t name names, but Brooks brothers is a great example. It’s got a great following. It had the strangest real estate footprint. They were – they had single stores that were paying $3 million a year in rent. I won’t name names and the ability to reject those leases and create profitability there, get out of bad stores, reduce the overhead and then do all this special marketing and with ABG has been a winning formula. In addition to that, we source it better and since we have this platform, where we can leverage our base off of, it’s just like – it’s been a very profitable thing. I will tell you one day spark will be worth. I mean, this isn’t my style, but it’s going to be worth, we’re going to make a plus on that investment without question. And it’s just – we know the brands, we do a lot of research. ABG has been a very good partner. They know how to blow out the license aspect of it, which we’re a partner in. We get out of bad stores. We buy the inventory at a discount. We right-size the overhead and we’re just – and with better business judgment and lo and behold, you suddenly have a business that’s got positive – significant positive EBITDA and you haven’t paid much for it that and I think when you put it all together, we’ll have something that’ll have great positive EBITDA and we’ll end up making $1 billion plus out of it.

Whether we look forward to you thinks…

Well, my partner thinks a lot more, but I’ll give you that number.

We look forward to the exit and seeing that billion dollars crystallized.

I mean, yes. I don’t – it’s been a good, it’s been a great investment, so why – I don’t know that we’ll exit anytime soon.

Okay. Thank you.

Our next question comes from the line of Caitlin Burrows from Goldman Sachs. Your question, please.

Hi. Maybe, just following up on Alex’s question more on the near to medium-term then. So, you’ve mentioned that your investments in the retailers have been at inexpensive prices allowing you to earn a significant return in terms of how this ends up impacting Simon’s own earnings in the near to medium-term. Do you expect the contribution to be meaningful itself? And if so, like by how much, and when, or is it that the investments generally support Simon’s core business, or I guess both?

Well, I think it’s the above. It will be profitable. We have that separate line item in our 8-K, what page is that?

17?

It’s a little, the only thing, Caitlin, it is a little – obviously, it’s more volatile than the rent aspect of our business. But you’ll – because it’s getting a little bit bigger, not materially bigger, but a little bigger, we decided to outline that separately. So, you can look at it as a standalone on its own. And then obviously, don’t forget, they do pay us contracted rent to – Spark is a rent payer to the Simon Property Group and it’s a property. So, we get the added benefit of the cash flow from running the business operate and then obviously, we get the added benefit of the rent, that’s collected from the entity with the stores that we have.

Okay. And then maybe, on the dividends, I know it’s up to the board, but given the $1.30 per share dividend for 3Q, the historical dividend rate, current FFO and cash flow, what metrics or drivers will be most important in establishing the 4Q dividend and that of future quarters?

Well listen, I think, I think we still are very, very cautious in the sense of the dividend, just with respect to COVID. So, once we, I mean, I feel like at least that the worst is behind us, but we don’t know for sure. So, I think we’ll continue to be conservative in that. Obviously, you see our cap spend a way down a new development or redevelopment, that may pick up a little bit next year. So, we’ll balance that obviously, we got to deal with our taxable income as well, but I can’t give you a real through run rate yet and I think we’ll be in a better position in 2021 to explain that when we do our earnings guidance, which we will reinstate in our earnings call, I mean, we have a pretty good idea what we expect from next year. But we’d like to go ahead and finish the year as well, given all the volatility out there, but we’re confident of dividend and the cash paying aspects of it and the cash flow generation from our company. And I think if you saw that in the Q3, a reasonably healthy pickup from Q2 and when we were really in the midst of trying to figure out COVID.

Okay. Thank you.

Sure.

Thank you. Our next question comes from the line of Michael Bilerman from Citi. your question, please.

Great, thank you. Good evening, David. I was wondering if you can talk a little bit about the leasing pipeline. You’ve talked about the leasing that you accomplished in the third quarter, that two million square feet and a very large pipeline that you’re working on. And I was wondering if you can provide us maybe with some a little bit more granularity about that pipeline, how much of it is new leasing for vacant space, new leasing for tenants that are going to be vacating [ph] and also potential renewal activity. And within that, maybe you can sort of just highlight the changing nature of maybe, the leases. I don’t know if there’s differences in term or TIs or anything, just to give us a little bit more flavor for what the current environment is like.

Well again, that’s, I’m not going to get into the – as much as you want. I’m not going to – that’s not really the purpose of the call to go through the granularity of all the leases. But I would say generally, the lease terms have not changed. TAs have not really increased and we’re seeing more box activity. There’s a number of retailers that want to grow their footprint in the outlet business, a number of the better and the higher brands. We’re also seeing that the Parkers of the world wanting to grow their footprint and the internet oriented companies then you see companies like American Eagle and others that are growing their footprint. There’s a well-known retailer that has their kind of casual wear business that’s growing their footprint significantly. I think we’ve got 20 deals in the works for them. So, it’s across the board and I would say, we’re mostly replacing spaces that we got back from bankruptcies, leases that have terminated and the renewals are – a lot of the renewals we’re doing now, we’re doing as part of our COVID initiation. So to the extent that we did a deal in abatement, we may have addressed 2020 and 2021 renewals, and it’s a judgement retailer by retailer and it’s working it, I mean, obviously the nations aren’t easy, because I mean, COVID has made them nervous and obviously, there’s a lot of excess capacity in our retail real estate industry. But I think we’ll hold our own and I – and look, I think the cash flow, we’ll see improvements for cash flow next year. And again, – and that will be a combination of lease renewals, new business, better sales, we lost a lot of income just, because we were shut down with all of our Simon brand venture income, all the stuff that’s traffic-driven. So, I think we’ll make a rebound along all those lines. And no, we’re not doing just percentage rent deals. The outlet business has had historically; some of the lead anchors have had percent rent deals only. to the extent that we do it, we have a floor in there and a clearly defined definition of sales, but it’s all over the board, but it’s – I guess, what we’re trying to convey to you, Michael, is that we are open and doing your business, and that’s support, and I think we’ll have a better, we’ll get more granular next quarter, but we’re open to doing new business and the retailers are – sure there are a number of closing stores. There are a number of bankruptcies, but the ones that are out there are looking to grow their footprint.

That’s helpful color. And then just as a follow-up on capital deployment obviously, the big focus of yours has been a lot of these innovative transactions buying some brand named retailers, but you also talked on the call in response to a previous question about buying high-quality real estate and I wanted to better understand what sort of opportunities may be out there, either buying from your joint venture partners, which may want to reduce their retail, or maybe, they don’t and they want to go further in, but you also have a transaction that you’re having over, that’s very high-quality real estate. So, I’m just trying to understand how all of this fits together.

Well, Michael, again, I respect you immensely and we really – I’m not going to not going to get into the tailwind situation; obviously, you saw our litigation expense with it. But we’re not out of – I’d say if there is quality real estate, we’re going to look at it and much like – and it, but there’s got to be bargains that can be had. And so we’ll see what that transpires, but nothing really, I want to – and also want to be, because we’ve been asked this. I mean, we’re not between the penney and closing of Brooks and lucky. There’s really nothing else on the spark or the retail front that we see right now clearly, for the rest of the year. So that business is all about integrating Brooks and lucky into spark. And then obviously, we have a tremendous amount of work to do partner, Brookfield and the management team at penney to sustain their turnaround. And so we’ve – our plate is full in that category. There won’t be anything going on, on that front. And we’re really – right now, we haven’t really looked at anything external, because obviously, we got our hands full, but it is a testament to the company that, we can do penney, we can do our debt deal. We can shut down our properties, open them up deal with we’ve done 14,000 lease amendments. right, Brian?

Yes.

we’ve collected rent, that hasn’t been easy. Okay. It’s not like they just suddenly said, okay, I’m going to send you a rent check that it hadn’t been that easy. So, I mean, we’ve been busy, obviously, we’ve done a lot of refinancings on the secured front. We’ve been doing just about – there we shut down the pipeline in terms of redevelopment. development brought it back up to some extent. So, I mean, we are – we got our hands full, I think we’ve been executing unbelievably with all the – all of the things that have been thrown at us. So, we’re really not looking externally at this moment.

It sounds like Brian has less hair now.

he – by the way, I think between Tom and Brian and Adam here, I’m the only one with hair; however, depending on your vantage point, you may accuse me of being in the thoughts. So, okay. Let’s move on. Let’s move on.

Okay. Thanks.

Thank you. Our next question comes from the line of Derek Johnston from Deutsche bank. Your question, please.

Hi everyone. Good evening. Allied Esports, PARM, pinstripes, Soho House, and Nobu Hotels, how do you guys view these earlier pre-COVID investments and/or partnerships, and do you still believe them to be a viable path forward posting them and as we emerge from the pandemic or in effect, has the merchandising approach actually changed?

No. Look, obviously we wish – good question, and we obviously wish that the pandemic hasn’t – didn’t hit us, but – and hit those businesses, but Soho has a great brand and ultimately, will be stronger and gets everything back online. So, the reality is very comfortable and they actually brought in some new capitals at the price that we did a couple of months ago, I think. So, Soho is great. PARM, we actually have Woodbury and Burlington opening next year, I think Woodbury’s opening in January and Burlington in the spring, and my son and I and if Jeff Rosnick’s [ph] listening, which I doubt he is, but we had a great carried out dinner at PARM. So, I’d encourage everybody to go eat there, it was really good, chicken PARM dinner. I think it’s a great brand; lifetime will be the survivor in that industry. I have all the confidence in the world, a great CEO, entrepreneur, great brand, great customer base. So, I think by and large, we feel like we’re a pretty good spot. I don’t think – I think what’s changed there, because I don’t think we’ll do the little venture deals the way we did, even though we’ve had some recent pops in those, meaning we got some, we’re going to – we’re selling our interest in the MDs at a profit and we’ve – there’s some new capital that’s come into some of those businesses at prices higher than what came in. but I don’t think we’ll do those little deals anymore. I think we’ve got too much too much to say grace over. But I think all of that we’ve invested in, we feel generally pretty good though. They’ve all frankly – they’re all fit the flywheel that we were creating. We just didn’t anticipate, the black swans of black swans, and – but all of those companies are alive and I expect them to come out of it, okay.

Okay, great. And sticking on some larger brands, are some of the brands you recently made lifeline investments? I know they were mentioned briefly lucky, Brooks Brothers, Forever 21. Will any merchandising additions and perhaps with Authentic drive a focused remerchandising mix at J. C. Penney and hopes to accelerate sales, is that on the table?

Great insight and the answer is absolutely. So that’s one of the interesting things that we found is, we do think that the combination of our relationships with a direct-to-consumer crowd, as well as all the brands that either we control or that ABG does, that those products will find a home in Penney. And there’s a lot of intense discussions going on. So, we would expect to enhance the Penney vendor matrix with the brands that ABG controls as well as ours. So very, very astute and the answer is without question.

Thank you.

Thank you. Our next question comes from the line of Mike Mueller from JPMorgan. Your question, please.

Thanks. Can you tell us what the pro rata uncollectable reserve is that’s in minimum rent for the quarter?

The pro-rata minimum rent in our joint ventures? Not sure.

No. The pro rata, the uncollectable reserve, what it is our pro rata basis in the quarter?

We’re really doing this on a gross basis, because that’s how we look at it.

Okay. And can you talk about how similar or different traffic and sales are at the outlets versus the malls?

The outlets are performing, I don’t want to necessarily get into the specifics, but the outlets are performing better. What we’ve seen across the board though, whether it’s an outlet or an enclosed, if it does cater to tourism, those are ones that are continued to be – continued to underperform our average. So, whether it’s in Orlando, enclosed or outlet, in Orlando, we have an enclosed mall there, we have the outlet centers that market both are underperforming with because of the lack of tourism and obviously, Universal and Disney operating at much less than full capacity.

Got it. Okay. That was it. Thank you.

Thank you. Our next question comes from the line of Floris van Dijkum from Compass Point. Your question, please.

Thanks for taking my question, David.

Sure.

I had a question on Authentic Brands; you suggested they’re going to step into the J. C. Penney deal with Brookfield and yourself. Would they be an equal partner or – and what pricing would they step in at the same price you guys bought?

Yes. the same price they will not be an equal partner, but they’ll put in – we’ll do see in our investment both us and Brookfield based upon the contribution they make.

Great. And so how do you look at Authentic Brands, particularly, I mean, you talked a little bit about having their brands – selling their brands exclusively through the J.C. Penney outlets and increasing the J.C. Penney private sales it sounds like?

Well, I didn’t say that’s exclusive, but they have a – they control a number of brands, like Juicy Couture as an example. And they’re – Juicy Couture is not in J.C. Penney. And so we’re going through the vendor matrix now, to eventually, I think Penney will end up distributing those kinds of brands that ABG controls, J.C. Penney department store. So, it’ll be a win-win for everybody.

Okay. Maybe, my follow-up question with some of those brands as well, particularly as it relates to the outlet business. So, you mentioned your outlet business is doing quite well; obviously they’re open air. So, they don’t have quite the same restrictions. Maybe, if you can talk a little bit about how you think the outlet business could – is it still going to be as reliant on apparel going forward and how does Authentic Brands fit in and is Authentic Brands a tenant right now, or a large tenant in your outlet business and could they be in the future?

Authentic Brands is not really, I mean, they had some brands that we don’t – we’re not invested in, but they do have outlet stores now. They don’t necessarily operate those stores, but take an example, Volcom, where they’re a partner with Volcom. We don’t – we’re not Simon Property is not investor in that, but they own the IP and they own part of the operations. But it’s really; Volcom is used to be owned by Kering Group and then sold it. But they operate Volcom itself, operates outlet stores in our portfolio. So, they are not an operator of “stores.” ABG, but they do have – they do own intellectual property of certain brands that do operate stores in our outlets and that will continue, but that’s been that way for years. So again, but we’re not involved in everything that ABG does, like Joe and others. I mean, I do think a number of their brands do have store potential. And they’ll either operate or find an operator operate those stores. And what was your other question? I’m sorry. I forgot it.

Yes. The other question David was in regards to the apparel, the severance of apparel and – do you see that changing overtime?

Look I think, generally, we’re seeing a lot more interest in home furnishings and the life we’re doing a lot more deals in the outlet sector with that – without naming names, but all the home furnishing and furniture folks. And so I think as you’ve seen that shift generally speaking, I think we’re seeing a lot of that pickup in the outlet business as well.

Those typically would have the lower sales. Is that a concern for you, or do you think it’s all about driving traffic at the center?

I think it’s all about driving the traffic. I have no concern about that at all. And usually, those are a little big boxes, so that the rent that’s leaving versus, what I’d rather have a dress barn or an RH. okay. That’s right. So, would I rather have – so that it says kind of trade-offs that I think are available to us. I think the mix actually will significantly impact – improve, because we’re going to end up reclaiming some of the older less relevant brands for some of the good or the better brands.

Thanks, David.

Sure.

Thank you. Our next question comes from the line of Linda Tsai from Jefferies. Your question, please.

Hi. Your overall leverage is much better than your peers, but net debt to NOI is a term understandably since 2019. What sort of leverage do you want to target and how would you expect this to trend in 2021?

Well, our leverage should – debt-to-EBTIDA should decrease, right. So, we’re generating cash. Our development spend is modest and the excess cash other than dividend will ultimately, go to reduce our indebtedness, so – and we’re also sell – we’ll sell assets. So, we’re still looking to essentially maintain our balance sheet. I mean, that’s an advantage that we’ve worked very hard to achieve, hasn’t been easy and I would not – we’re not going to blow that. Brian, you want to add anything?

No. We don’t naturally come down next year, Linda, just given the recoup of NOI relative year-over-year. So, you will see us come back down to a more normalistic or a level consistent with prior periods is our expectation.

Thanks. And then in terms of the non-core assets that will be shed, albeit not a material impact, over what timeframe would this happen? Like, would you wait for some stabilization in NOI?

Well, I just think it’s going to, we’re – in fact, we’re – we’ve got an asset now we’re about the market. I mean, we’re going to try and do it. I mean, we’ll see, it’s not – this isn’t, this is not earth-shattering big projects, but there’s – respect to shed, some non-core assets that won’t have a – not going to have a material impact, but just it’ll help us run the company better, because we won’t have to focus on it.

Thanks. And then just one last one, in terms of the 85% collections in 3Q, do you think this will stay neutral in the neutral territory in your term, or would you expect bigger improvements?

Well, I would expect it to be hopefully, better in Q4. But we’re just – we’re similar in October and – but obviously, I would hope that we – as I mentioned to you before we still got some bigger accounts that we have not made a lot of progress with. I’m hopeful that something positive will happen there. So, once that happens, then it’ll jump up.

Thanks.

Sure.

Thank you. Our next question comes from the line of Haendel St. Juste from Mizuho. Your question, please.

Hey, good evening. Thanks for taking my question. So David, I was hoping you could talk a bit more about the environment for larger anchor box space; specifically, I’m curious where it’s coming from and how the spreads compared to the rest of you overall leasing? And now, are you able to run any commentary at all whether you’ve leased any of that space to Amazon? Thanks.

Yes. Believe it or not, there are still deals to be done. I mean, we’re talking to a department store to take a couple of boxes over, there’s not going to be 30 to 40 deals, but there’ll be 15 and I think our retail community is generally, the healthier companies are looking towards the future and believe in the – in having the right footprint and we’re going to shrink the bad stores, but I think they’re going to look at new opportunities. It’s not going to – we still believe in the mixed use effort that we’re undertaking. Obviously, we don’t have to be in a rush to do it. And we’re not going to build, we’re looking at plans that maybe, had a 60,00, 70,000, a 100,000 square feet of new retail, small shop space, or you’re not going to program that, but we’ll make it up with boxes and the lower investment, and still manage the appropriate returns. So, there’s still opportunity to release the space. Fact of the matter is we still don’t own a lot of it that we want, but we’re not going to pay appropriate prices for it and there’s certainly a gap between the bid and the ask. We’re really not bidding, and they’re really not asking, but if we were to bid and they were to ask, it would be a big gap, but good real estate will survive. But it’s going to take capital, great operator and it’s not going to be for the faint of heart and – but it’s going to be reprogrammed. So, just something jumps out like a Brea, we’ll probably have, we always had two anchors, but we had this is the old Sears store that we control. We’ll still do the two anchors there. But we probably programmed a 100,000 square feet of restaurants, small shops, and we’re not going to do it. We’ll probably do 2030, but the costs will go down and we still think we’ll have the appropriate returns on investment. So, there’s still stuff to do to improve our portfolio and there’s still some decent demand on just box for box.

Got it, got it. That’s helpful. Are you able or willing to say if any of that leasing has been with Amazon specifically?

I didn’t hear you well. Could you repeat it, please?

Apologies. I was curious if you’re able or willing to share any of that leasing has been specifically with Amazon.

There – we have no signed deal with Amazon. No.

Okay. And a follow-up on the leasing spreads in the quarter down another 400 basis sequentially minus 4% second quarter in a row. Was there anything having a disproportionate in that calculation during the quarter, when do you think that trough and I guess more broadly, how importantly, do you think having a vaccine effectively at hand will be during the ongoing lease negotiations and the near-term trajectory of leases as we build back to pre-COVID cash flow? Thank you.

Yes. I think the spread is really mixed, because we had some boxes that rolled out last year compared to this year. So, I wouldn’t – that’s a number I wouldn’t jump up and down whether it’s really good or not so good as in this quarter, it’s really a mix issue. Because we had a lot of box activity last year that we rolled out and this year, it’s 12 months later. So, it’s really more of a mixed issue and you could see that in our base rents increasing, which is probably a little more important stat.

Okay.

Okay.

Thank you.

Sure.

Thank you. Our next question comes from the line of Vince Tibone from Green Street. Your question, please.

Hi, good evening. I have a few questions related to co-tenancy clauses, when an anchor is tenant temporarily closed, like the movie theaters today, could that trigger a co-tenancy cause at your center? And then also more broadly, just can you help us understand what impact co-tenancy clauses have had on financials this year, if any?

Very little Vince, this year and we don’t expect it to be meaningful or immaterial, let me restate it and say it better. It’ll be in material next year.

Yes. Okay. And then on this temporary point, like if the theater is temporary closed, is that potentially an issue on that front or what – I know it’s hard to obtain much.

No, no. it’s a more appropriate question. I think, of all of the theater closures at one deal and I can’t remember which one that it may affect a co-tenancy at one of the mills for a few of the boxes. It’s essentially immaterial.

Okay. Thank you for that. And then I’ll let you control J.C. Penney, and you’re clearly bullish on the future there, but how are you thinking about the pace of potential story captured there some of your better centers and even in order to pursue redevelopment opportunities in the next few years?

Well, it hasn’t closed. And in fact there was a hearing today, which I did not hear. I did not hear what happened, but to approve our – it’s still not done yet. So, it hasn’t closed assuming it gets approved. It’ll be sometime later in the month. Look, it’s complicated way. It’s split up between what the operating company owns in the real estate and what the POSCO loans. We have rights. We, being Simon, have rights to recapture certain assets. So, does Brookfield, but I think we’re going to be patient about it, because I think the most important thing right now is just to get it stabilized and positioned for the future, but eventually, there are certainly some stores that probably are not maybe, properly positioned with us, where we do want to recapture the space. And I think that’s an opportunity, but you’re not under – we don’t feel the pressure to do that anytime soon. But that’ll be next year’s business. And then when that happens, I get to negotiate, I guess I don’t really know what to do. Maybe risk, maybe our guys, maybe Brookfield. I’m not really sure how it works, but we will, we will, we will appropriately do it fairly with all the constituencies involved.

Okay. Thank you for that.

Sure.

Thank you. Our next question comes from the line of Juan Sanabria from BMO Capital Markets. Your question, please.

Hi, thanks for the time. I was just wondering how discussions are going with grocers given how strongly they performed in kind of their space to date with the COVID and how that’s transpired. Have you seen traction in the various different format or kind of what is, are they most attracted to from the different types of assets that Simon owns and controls?

It’s still reopened one in a specialty grocer in Boca. Just recently, that’s doing very well. We just made a deal that I don’t know that I can announce it that we just signed the lease this week to replace fairway, the fairway market grocer in Nanuet with a great grocer. So, there are – what we’re really focused on is the specialty grocers as opposed to the big mammoth ones and I think there’ll be a handful of deals. It’s not going to be 50, but I think it will be over the next couple of years. There’s no way we can’t get 10 to 20 to specialty ones, like the one we did a bulk is great. It’s sort of an end cap of kind of the lifestyle center that we did it Boca and high-end grocer in, come in, get your prepared foods, quality. You still have the Italy’s of the world that are out there looking to do a business. I had a comment with them recently, that’s the same kind of category, prepared foods, specialty grocer, not necessarily a place; I guess you could pick up milk, but, more of prepared foods, dining or get your special consumable. So, I do think that’ll continue to grow.

Great. And a follow-up from me. You kind of talked about acquiring some assets, high quality retail. Have you looked at, or any interest in some of the Westfield centers given what they’re trying to do at the corporate level?

No. I mean, they’re doing what they’re doing, so nothing there to report.

Thank you.

Thank you. Our next question comes from the line of Ki Bin Kim from Truist. Your question, please.

Thank you. You’ve provided a helpful bridge looking at the portfolio NOI from last year to this year? One of the biggest components of that was that $270 million you mentioned. And it’s a big number. I was just wondering if there’s any kind of breakdown you can provide on the call?

Well, it’s a combination, as I said, of abatements and credit provisions. The credit provisions are mostly bankruptcies. How is it split, it’s – I don’t know, 60/40 somewhere in that range. Is that – if that’s helpful to you, again, I don’t – I view this as kind of a one – this is not going to be routine, but it’s kind of a one-time between the COVID impact, so to speak between Q2 and Q3, but it’s split roughly between abatements and credit provisions, which are mostly bankruptcies and abatements, and maybe, it’s 60/40 in that range. Is that helpful?

It is. And are you incorporating tenants on the watch list that are not being corrupt or not near-term bankrupt?

Credit provisions include lots of things beyond prepetition rent or anything else associated with a bankruptcy.

Okay. And just given the news today about the vaccine from Pfizer, does that make any kind of impact in terms of your mentality when it comes to lease negotiations? I know it’s early, but just curious.

Not really. I mean, listen, I – before the news today, I mean, we were feeling better that we had dealt with a lot of crap in Q2 and Q3, and we’re here to – and we’re here and our cash flows dramatically up and our collections are up, and we’re getting our business back to normal. So, we were headed that way anyway. But obviously, it’s – just I mean, this situation, is it black swan times two or three and it’s been sad for all of us to have to see what’s happened to the country good solid businesses beforehand that we’ve had to deal with our employees, obviously, all the people, in fact, – just maybe, there’s a little more of what’s the trays of peppermint – what’s that?

Pep in the step.

Pep in the step, I just think it’s good news. Let’s hope we can – let’s hope we can get out and get done. But now, it’s not going to – it’s not going to affect us, because we’re mostly dealing with COVID-oriented shutdowns or impact of those shutdowns. And listen I hope it gives our client face more confidence and that that’s fine. That’s good. It should, it should. And hopefully, we’ll see some benefits from that into 2021 and beyond.

Okay. Thank you.

Sure.

Thank you. This does conclude the question edition of today’s program. I’d like to hand the program back to David Simon for any further remarks.

Okay. Thank you and thanks for staying late on a Monday night. be well.

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.