Keeping Busy ♦ Simon Property Group (SPG) Has It Hands Full Trying to Keep Its Properties Occupied in the Age of Covid

Sector: REITs Kathleen Shanley, CFA August 19 , 20 20 [email protected] Keeping Busy ♦ Simon Property Group (SPG) has it hands full trying to keep its properties occupied in the age of Covid. Net income declined to $254 million in the second quarter ended 6/30/20, down from $495 million a year ago. The decline reflects mall closures in the quarter. (As of July 10, all properties had reopened, but seven properties in California closed again on July 15.) The company collected about 51% of its contractual rent billed for April and May; about 69% for June; and about 73% for July. The company has agreed to rent deferral and/or abatement agreements with some of its tenants (especially local businesses) but has gone to court to sue Gap over its unpaid balances. On its earnings call, Simon would not comment on its specific negotiations, but said the second quarter was reduced by about $215 million because of domestic rate abatements and credit provisions. Tenant receivables and accrued revenues ballooned to $1.5 billion at the end of June, versus $793 million at March 31. ♦ The occupancy rate was 92.9% at the end of June but could fall given the surge in retail bankruptcies. Simon is exploring ways to limit the damage. It is negotiating (with a partner) to buy J.C. Penney out of bankruptcy. It is in talks with Amazon about converting some department store properties into fulfillment centers. In February, it teamed up with Authentic Brands Group (ABG) to acquire Forever 21, investing $67.6 million for a noncontrolling 37.5% interest. It is also partnering with ABG (through a JV) to buy Brooks Brothers and Lucky Brand Jeans out of bankruptcy. The total investment is small relative to Simon’s $24 billion portfolio of investment properties. The hope is that the purchases will reduce the number of store closings, but it remains to be seen if the turnaround efforts will be successful. ♦ In February, Simon agreed to pay $3.6 billion in cash to acquire its Taubman Centers. The material adverse change clause in the agreement excluded pandemics, but on June 10, Simon said it was terminating the deal. It claims the pandemic had a “uniquely material and disproportionate effect” on Taubman, which failed to make enough cuts in operating expenses and capital expenditures. Simon filed suit in Michigan asking the court to declare that it has suffered a “material adverse event.” Taubman (whose shareholders approved the deal by a 99.7% margin on June 25) filed a counterclaim. The court ordered that the case be referred to mediation, but so far there is no settlement. A trial is scheduled to begin on November 16. ♦ Simon’s access to liquidity is a credit strength. As of 6/30/20, it had $8.5 billion in liquidity, including $3.6 billion in cash (counting its share of JV cash) and $4.9 billion in borrowing capacity under its credit facilities (net of $702 million of commercial paper with a weighted average interest rate of 0.24%). After quarter end, it priced $2.0 billion in senior debt, with three tranches maturing in 2025, 2030, and 2050. Proceeds were used to redeem near term maturities ($500 million due 9/1/20 and EUR375 due 10/2/20). In July, it repaid $1.75 billion under its credit facility and $750 million under a supplemental facility. (In the first quarter, the company drew down $3.75 billion under its credit facilities as a “precautionary” measure.) ♦ Partially offsetting the liquidity resources is Simon’s ongoing obligation (as a REIT) to pay out significant dividends. During the first quarter, dividends and distributions to unitholders totaled $744 million. The board of directors also authorized a new $2 billion share buyback program in February. First quarter buybacks were $153 million at an average price of $122.50 per share (versus yesterday’s close of $65.13). There were no buybacks in the second quarter. The second quarter dividend was reduced to $1.30 per share ($458.2 million) versus $2.10 in the first quarter. It was paid on July 24. Simon says that it expects to pay at least $6.00 per share in dividends this year, subject to board approval. As the Covid pandemic drags on, the near-term operating environment is likely to remain difficult. There may be more bankruptcies and ongoing pressure for lower rents. The 2.65% notes due 7/15/30 priced at T+200 and are now seen at T+183. We maintain an underperform opinion.

Gimme Credit LLC 08/19/20 Analyst's Data Sheet

REITs Simon Property Group, Inc. Kathleen Shanley, CFA Statistics as of 6/30/20

Three months ended Financial Highlights ($ millions) 6/30/20 6/30/19 Property Statistics* 6/30/20 6/30/19 Total Revenue-consolidated properties $ 1,062.0 $ 1,397.2 Total number of properties 168 176 Net income attributable to common 254.2 495.3 Occupancy--consolidated assets 93.0% 94.6% FFO of the operating partnership 746.5 1,064.4 Occupancy--unconsolidated assets 92.7% 93.9% Capex-consol properties (6 Mos) 337.5 403.3 Total portfolio occupancy 92.9% 94.4% Total portfolio sales per sq. ft. NA** $669 Balance Sheet 6/30/20 12/31/19 Base Minimum Rent per sq. ft. $56.02 $54.52 Total assets $ 34,026.2 $ 31,231.6 Open/Close Spread -0.4% 32.3% Investment properties-net 23,582.3 23,898.7 Cash and equivalents 3,306.1 669.4 *U.S. Mall and Premium Outlets Investments in unconsolidated entities 2,385.9 2,371.1 **Not reported gived Covid-related closures Investment in Klepierre 1,644.0 1,731.6

Debt Information-Simon Group 6/30/20 12/31/19 Debt Covenant Compliance Ratios Required Actual Share of consolidated debt 27,093.8 23,988.2 Total Debt to Total Assets ≤65% 44% Share of joint venture debt 7,226.1 7,214.2 Total Secured Debt to Total Assets ≤50% 19% Share of total debt 34,319.9 31,202.4 TotalFixed UnencumberedCharge Coverage Assets/ Ratio (X) >1.5X 4.8X Share of cash & equivalents 3,632.2 1,114.5 Unsecured Debt ≥125% 244% Share of net debt $ 30,687.7 $ 30,087.9

Equity market cap 24,172.4 52,756.8 Total Capitalization 58,492.3 83,959.2 Debt/capital 58.7% 37.2%

NOI Composition U.S. Portfolio by State Share of NOI NOI by Asset Type Florida 16.2% U.S. Malls and Premium Outlets 80.8% California 14.3% The Mills 11.6% Texas 10.6% International 7.6% New York 7.4% 100.0% Nevada 6.1% Next 5 (PA, MA, NJ, GA, IN) 22.3% 76.9%

Top Tenants (U.S. Malls and Premium Outlets) Percent of Percent of Percent of Percent of Number of Total SPG Sq. SPG Base Number of Total SPG SPG Base Inline Store Tenants Stores Ft. Min. Rent Anchor Tenants Stores Sq. Ft. Min. Rent The Gap, Inc. 403 2.1% 3.5% Macy's Inc. 103 11.0% 0.3% L Brands, Inc. 287 1.0% 2.2% J.C. Penney Co. 57 5.2% 0.3% PVH Corporation 234 0.8% 1.7% Dillard's, Inc. 36 3.6% - Tapestry, Inc. 248 0.6% 1.5% Nordstrom, Inc. 27 2.5% 0.1% Ascena Retail Group Inc. 350 1.1% 1.5% Dick's Sporting Goods 34 1.3% 0.5% Signet Jewelers, Ltd. 337 0.3% 1.4% Hudson's Bay Co. 17 1.2% 0.1% Capri Holdings Limited 139 0.3% 1.2% Sears 8 0.9% - American Eagle Outfitters 199 0.7% 1.2% Neiman Marcus 12 0.8% 0.1% Foot Locker, Inc. 206 0.5% 1.2% Belk, Inc. 7 0.7% - Luxottica Group SPA 375 0.4% 1.2% Target Corporation 6 0.5% 0.1% Total 7.8% 16.6% 27.7% 1.5%

Source: company reports