Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2020 Simon Property Group Inc. earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Thomas 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 be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995. 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 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 billed 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 the more than $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-based rents or ancillary property revenues caused by the COVID 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. The third quarter also includes of our FFO, $0.10 per share of lower straight-line rent and CAM, $0.06 in 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 the year-over-year change in the context of portfolio NOI presentation, which you can find on page 17 in our supplement issued today. As a reminder, the following amounts are on a gross basis and are not at company share. Total portfolio NOI decreased from $1.5 billion in the third quarter of last year to $1.2 billion this year, a decrease of 22% or approximately $338 million. The year-over-year decline for the third quarter was primarily due to the following, approximately $270 million in total from both domestic rent abatements and higher provisions for credit losses, primarily associated with retail bankruptcies. It is important to note we did not amortize any of the abatements granted, we recorded the abatement as negative lease income in the period in which the abatement terms were agreed with the tenant.
The majority of the abatements that were granted were to the thousands of local small businesses, entrepreneurs, and restaurateurs who have been suffering immensely with COVID. Our efforts to support local tenants in our centers were resoundingly appreciated as nearly 95% of our local tenants reopened their stores. An additional $165 million of the reduction was due to lower minimum rents and reimbursements, sales-based and short-term leasing, and ancillary property revenues as a reduction from COVID, as well as lease terminations from our bankrupt retailers and, as I mentioned to you before, lower sales volume due to a lingering COVID impact. These decreases were partially offset by $100 million of our cost reduction initiatives. Operating metrics. Mall and premium outlet occupancy at the end of the third quarter was 91.4%, down 150 basis points from the second quarter of 2020.
All of that is essentially a function of tenant bankruptcies, which caused 120 basis point reduction. Average base rent was $56.13, up 2.9% year-over-year. We are pleased to report shopper traffic and total sales volume continue to improve with each sequential month and throughout the third quarter. Quarter-over-quarter sales, that's Q3 of 2019 compared to Q3 of 2020, were down 10%. Leasing spreads declined for the trailing 12 months, primarily due to the mix of deals from the prior year period that have fallen out of the rent spread calculation. The leasing environment is improving. In the third quarter, we signed 600 leases for nearly 2 million square feet. We have a significant number of leases in our pipeline. We are pleased to see a continued strong interest for spaces across our differentiated portfolio.
Demand for space in our premium outlet portfolio has been really strong. With the space that has become available as a result of recent tenant bankruptcies, we are signing deals with the best new and exciting brands who want access to our highly productive outlets. In ode to Rick, who's not here, but listening, I'm certain, we are executing both long-term and pop-up deals with leading brands, including names like Prada, Ferrari, Allbirds, and UGG, just to name a few, and many more. During the quarter, we also resumed construction on the redevelopment of the Macy's men's store at Stanford Shopping Center with a RH Mansion. We started construction of a former Bloomingdale's store for the Falls and at the Shops at Mission Viejo.
The good news with this diligent focus on capital spend, all approved projects right now through 2020, our net cash funding is only $140 million. Now let me turn to brand and retail investments. SPARC Group, as you know, is our 50-50 joint venture with Authentic Brands Group, acquired Brooks Brothers and Lucky Brand out of bankruptcies. Both are storied and widely recognized brands with combined global sales of over $1.5 billion. We acquired these companies cheaply, and we believe we can grow the EBITDA and achieve a significant return on our investment. Both brands have been integrated into the SPARC Group platform, and we're very pleased with the progress we've made in such a short period of time. We recently partnered with Brookfield, as you know, and are in contract to acquire the operations, intellectual property, and certain real estate of the J.C.
JCPenney in a going concern transaction under Section 363 of the Bankruptcy Code. We believe in the Penney's brand. The company did over $9 billion in sales pre-COVID. We believe we can return the company to increasing sales and grow the EBITDA. The company has a loyal, core, diverse and inclusive customer base concentrated in the moderate to higher aspirational category. This customer is important to the community, as is JCPenney, and to us. We expect we will continue to grow this customer over time, and we're extremely proud to serve the community in that capacity. We believe that with us and Brookfield bringing focus, energy, passion, ownership, enhanced financial discipline to the operations, we'll have the opportunity to earn a significant return on our investment. As part of that, we also anticipate our good partner, Authentic Brands Group, will become an investor in the buying group.
As importantly, we're very pleased to save over 60,000 jobs in our country. We continue to do our part to support the local community in our efforts. Balance sheet. At the end of the third quarter, our total liquidity was more than $9.7 billion, consisting of $8.2 billion of available credit facility, borrowing capacity, $1.5 billion of cash, for a total of $9.7 billion. This is, as a reminder, net of $623 million of quarter-end commercial paper outstanding. We've been active in the secure debt markets and have addressed all of our remaining loan maturities for the year, including a refinancing of The Mills at Jersey Gardens through a single asset CMBS securitization which has been priced and scheduled to fund next week.
Our debt covenants are well above required levels, well above it, with significant headroom in our balance sheet, financial flexibility, our distinct advantages in our retail real estate industry that cannot, and I'm sure are not, overlooked. In the dividend, we paid a common stock dividend of $1.30 in cash. Finally, before we open it up to any questions, I again want to thank my Simon colleagues for their continued resolve in running our business under often trying circumstances, an environment that has been constantly changing. We have withstood COVID. We have withstood government shutdowns. We have withstood lack of federal and state help, especially in real estate taxes. We have withstood fires in Northern California, hurricanes in Louisiana and elsewhere, and civil unrest.
We're pleased with the cash flow we're generating. I want to thank my colleagues for busting their hump. Things are looking up. We're ready for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one. As a reminder, please limit yourself to one question and one follow-up. Our first question comes from the line of Craig Schmidt from Bank of America. Your question, please.
Oh, great. Thank you. Just 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 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 has been asked to essentially shut down. That is of recent. That happened over the weekend. I think enclosed malls are being treated unfairly and inconsistently. We deal with what we deal with right now. That's the only one, Craig. We're hopeful that that will reopen. Listen, I think the consumer obviously is cautious. Our quarter-over-quarter sales decrease is only 10%. The consumer is starting to come back. They're wearing masks. With all our protocols, we're hopeful that trend will continue. There's certainly no guarantees. As far as predicting the government and state and local actions, obviously the level of inconsistency has been very frustrating. It's been state by state, city by city, county by county.
It is a testament, and often overlooked, that we've been able to deal with this as well as we have. 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 improvement in collections. I think we're making basically all the right moves, but we can only deal with what we can deal with. 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. 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. The one line item that's up, if you look 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 basically other property types, and I am hopeful that at one point in the near future that these communities will recognize it.
Great. 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 3Q20 could be the trough, or do you still expect maybe some lower occupancy in first quarter 2021?
Well, I think 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 it is possible that we'll have further bankruptcies and when that happens, obviously, we'll deal with that. 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, Richard 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, thank you for doing it. I want to ask a strategy question, maybe think about your portfolio. One of the things I think is misunderstood about Simon is that you're not a mall REIT. You own a diversified portfolio of retail real estate across property types and the quality spectrum. I'm curious, as you think about your portfolio on the other side of COVID-19, are you comfortable having, call it 46%-49% of your total NOI coming from malls? 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.
Well, listen, I think we're a strong believer in the outlet business, as you know, especially with retailers and brands moving more and more toward direct to consumer. I think that plays well into that. Obviously, the outdoor environment continues to be an advantage, certainly with the COVID still very much part of our lives. I like where we are. I think over time, our portfolio non-core assets will be shedded. Usually, those don't have a material impact on our NOI or our cash flow. 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.
I feel kind of like the diversity by region, by product type, and certainly by domestic versus international. 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. 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 to see some more restrictions. 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. I spent an hour and a half with my partners, both at Rue La La, Gilt, and the Kynetic folks going through a bunch of brands that want to be hooked up.
This vision that we had is actually going to come to fruition, I hope, knock on wood. I like where we are, but we're always looking to add quality real estate. I look at the quality more. Quality to me is more important than potentially the property type. I think that's the big focus. There's going to be obsolescence in retail real estate. I think owning the best of the best is going to be a key to our success in the future.
Yeah. That's really helpful, David. The reason I was asking the question is, it just seems to me that on this other COVID-19 world, whatever it is, that the retailer itself is probably like you, agnostic on the type, and is just looking for the best quality. I'm curious, is that beginning to resonate with retailers as they think about their footprint and how Simon Property Group can help fulfill those footprints? Or is it still too early?
No, absolutely. I would say that trend has happened completely. In the mall, the mall has always competed with the guy across the street, 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. You got to own quality, and today it's somewhat irrelevant whether it's this kind of asset or that. It's really, does it have critical mass? Is it well located? Does it serve the customer the way they want to be served?
Got it. That's helpful. Thanks, David.
Sure.
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 in Indy. How's that, David?
We're definitely out here, man. Okay.
Look, you're center of the biotech and health world, so we appreciate everything that the biotechs are doing.
The good news is when Lilly gets their vaccine, I hope my team's first in line just because they're across the street from us. Okay? We'll see.
Excellent. Two questions. First, again, appreciate the breakout, and actually this provides clarity so that people can see the collections on 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. 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 jump by $200 million? 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 that-
No, you're asking for guidance cleverly. Listen, everything is very still up in the air, and obviously, the world's had this positive news today about the vaccine. The fact is, COVID is spiking, so we have to be very serious about that. I would hope, Alex, the big thing that we've confronted aggressively in Q2 and Q3, and the way I look at it, frankly, is almost put those two quarters together because you're right. We took the P&L hit when we granted the abatement. That's the right way to look at it. I would hope that the vast majority of any abatements are behind us. That, 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. What is that win-win?
It's new deals, lease extent. It's the normal stuff that you would do. I would literally hope that the worst is behind us. 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. 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 provisions as well as abatements, are behind us.
Okay. David, as you said earlier, the abatements were largely your local tenants, so they've either made it or they haven't. Do you have
I said the majority of it. We did grant abatements to others. There's other abatements that have been in there. Again, it's a pretty big number in terms of that we didn't have to do, and like I said, I hope 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. Correct. Basically, you've taken the hard approach with the tenants, both on deferrals and abatements in the 2Q and 3Q, hopefully going forward is less. Okay. I get it. The second question, David, is on the retailer front. Brooks Brothers, Lucky Brand, you did Aéropostale, now you're going to do JCPenney. You highlighted the sales, you highlighted this customer base that's loyal to the brand. What are the elements, without giving away totally the secret sauce, what are the elements that give you confidence when you look at troubled retailers and bankrupt ones to say, "Hey, you know what. The core shopper for this brand is still there despite that the retailer's had trouble and is in bankruptcy. We feel that the core shopper is substantially still in place that we can recover."? Because it's certainly not just find 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. What is it that gives you that confidence?
Well, first of all, we don't underestimate buying things cheap, okay, Alex? 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, then we attack the problems with the profitability. Give you, I won't name names, Brooks Brothers is a great example. It's got a great following. It had the strangest real estate footprint. They had single stores that were paying $3 million a year in rent. I won't name names. The ability to reject those leases, and create profitability there, get out of bad stores, reduce the overhead, then do all the special marketing, 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 been a very profitable thing. I will tell you, one day, SPARC will be worth. We're going to make $1 billion plus on that investment, without question. 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 rightsize the overhead, and we operate with better business judgment, and lo and behold, you suddenly have a business that's got significant positive EBITDA, and you haven't paid much for it.
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+ out of it.
Well, we look forward to seeing.
My partner thinks a lot more, but I'll give you that number.
Well, look, we look forward to the exit and seeing that $1 billion crystallize. Thank you, David.
It's been a great investment, so I don't know that we'll exit anytime soon.
Okay. Thank you.
Thank you. Our next question comes from the line of Caitlin Burrows from Goldman Sachs. Your question, please.
Hi. Good evening. Maybe just following up on Alex's question more on the near to medium term. 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? If so, by how much and when? Is it that the investments generally support Simon's core business, or I guess both?
I think it's all the above. It will be profitable. We have that separate line item in our 8-K. Tom, what page is that? 17. 17. The only thing, Caitlin, obviously, it's more volatile than the rent aspect of our business. 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. Obviously, don't forget, SPARC is a rent payer to Simon Property Group and its properties. We get the added benefit of the cash flow from running the business operationally, obviously we get the added benefit of the rent that's collected from the entity with the stores that we have.
Okay. Maybe on the dividend, I know it's up to the board, but given the $1.30 per share dividend for a 3Q, the historical dividend rate, current FFO, and cash flow, what metrics or drivers do you think will be most important in establishing the 4Q dividend and that of future quarters?
Well, listen, I think we still are very cautious in the sense of the dividend, just with respect to COVID. I feel like at least that the worst is behind us, we don't know for sure. I think we'll continue to be conservative in that. Obviously, you see our cap spend way down on new development or redevelopment. That may tick up a little bit next year. We'll balance that. Obviously, we've got to deal with our taxable income as well. I can't give you a real true run rate yet. I think we'll be in a better position for 2021 to explain that when we do our earnings guidance, which we will reinstate in our earnings call. We have a pretty good idea what we expect from next year.
We'd like to go ahead and finish the year as well, given all the volatility out there. We're confident about the dividend and the cash paying aspects of it, and the cash flow generation from our company. I think if you saw that in the Q3, a reasonably healthy pickup from Q2 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 talked about the leasing that you accomplished in the third quarter, that 2 million square feet, and a very large pipeline that you're working on. I was wondering if you can provide us, maybe with some 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, and also potential renewal activity. 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, I'm not going to get into as much as you want, that's not really the purpose of the call to go through the granularity of all the leases. I would say generally, the lease terms have not changed. TIs have not really increased. 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 the Warby Parker of the world wanting to grow their footprint and the internet-oriented companies. 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. It's across the board.
I would say we're mostly replacing spaces that we got back from bankruptcies, leases that have terminated. A lot of the renewals we're doing now, we're doing as part of our COVID negotiation. To the extent that we did a deal in abatement, we may have addressed 2020 and 2021 renewals. It's a judgment retailer by retailer. We're working it.
Yeah
The negotiations aren't easy because COVID has made them nervous, obviously there's a lot of excess capacity in our retail real estate industry. I think we'll hold our own. Look, I think the cash flow, we'll see improvements for cash flow next year. 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 Ventures income, all of the stuff that's traffic driven. I think we'll make a rebound along all those lines. 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 four in there, and a clearly defined definition of sales. It's all over the board.
What we're trying to convey to you, Michael, is that we are open and doing new business.
Yep
that's important. I think 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. Just as a follow-up on capital deployment, obviously the big focus of yours has been on a lot of these innovative transactions, buying some brand-named retailers. You also talked on the call in response to a previous question about buying high quality real estate. 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. You also have a transaction that you're having a lawsuit over that's very high quality real estate. I'm just trying to understand how all of this fits together.
Well, Michael, again, I respect you immensely, and I'm not going to get into the Taubman situation. Obviously, you saw our litigation expense with it. We're not out of, I'd say if there is quality real estate, we're going to look at it. We'll see what that transpires, but nothing really. I also want to be clear because we've been asked this. Between the JCPenney and closing of Brooks Brothers and Lucky Brand, there's really nothing else on the SPARC or the retail front that we see right now clearly for the rest of the year. That business is all about integrating Brooks Brothers and Lucky Brand into SPARC. Obviously we have a tremendous amount of work to do with our partner, Brookfield, and the management team at JCPenney to sustain their turnaround.
Our plate is full in that category. There won't be anything going on on that front. Right now, we haven't really looked at anything external, because obviously we got our hands full. 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. We've done 14,000 lease amendments, right, Brian?
Yes.
We've collected rent. That hadn't been easy, okay? It's not like they just suddenly said, "Okay, I'm going to send you a rent check." It hadn't been that easy. We've been busy. Obviously, we've done a lot of refinancings on the secured front. We shut down the pipeline in terms of redevelopment. Development brought it back up to some extent. We got our hands full.
Yeah.
I think we've been executing unbelievably well with all of the things that have been thrown at us. We're really not looking externally at this moment.
Sounds like Brian has less hair now.
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 same spot. Okay.
Thanks.
Let's move on.
Thank you. Our next question comes from the line of Derek Johnston from Deutsche Bank. Your question, please.
Hi, everyone. Good evening. Allied Sports, Parm, Pinstripes, Soho House, and Nobu Hotels. How do you guys view these earlier pre-COVID investments and, or partnerships? Do you still believe them to be a viable path forward post the vaccine and as we emerge from the pandemic? In effect, has the merchandising approach actually changed?
No. Look, good question. We obviously wish that the pandemic didn't hit us and hit those businesses. Soho House has a great brand and ultimately will be stronger as it gets everything back online. The reality is very comfortable, and they actually brought in some new capital at the price that we did a couple of months ago, I think. Soho House's great. Parm, we actually have Woodbury and Burlington opening next year. I think Woodbury's opening in January and Burlington in the spring. My son and I, if Jeff Zalaznik's listening, which I doubt he is, we had a great carried out dinner at Parm. I'd encourage everybody to go eat there. It was really good. Chicken Parm dinner. I think it's a great brand. Life Time, obviously, will be the survivor in that industry.
I have all the confidence in the world, a great CEO, entrepreneur, great brand, great customer base. I think by and large, we feel like we're in a pretty good spot. I think what's changed, Derek, is 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're selling our interest in MeUndies at a profit, and there's some new capital that's come into some of those businesses at prices higher than what we came in. I don't think we'll do those little deals anymore. I think we've got too much to stay grace over. I think all the brands that we've invested in, we feel generally pretty good, though they all fit the flywheel that we were creating. We just didn't anticipate the black swans of black swans.
All of those companies are alive, and I expect them to come out of it okay.
Okay, great. That's helpful. Sticking on some larger brands, are some of the brands you recently made lifeline investments, I know they were mentioned briefly, Lucky Brand, Brooks Brothers, Forever 21, will any merchandising additions and perhaps with Authentic drive a focused remerchandising mix at JCPenney in hopes to accelerate sales? Is that on the table?
Great insight. The answer is absolutely. That's one of the interesting things that we found, is we do think that the combination of our relationships with the direct-to-consumer crowd, as well as all the brands that either we control or that ABG does, those products will find a home in JCPenney. There's a lot of intense discussions going on. We would expect to enhance the JCPenney vendor matrix with the brands that ABG controls as well as ours. Very astute. The answer is without question.
Thank you.
Thank you. Our next question comes from the line of Mike Mueller from JP Morgan. Your question, please.
Thanks. Can you tell us what the pro rata uncollectible reserve is that's in minimum rent for the quarter?
The pro rata minimum rent in our joint ventures? Not sure.
No, the uncollectible reserve, what it is on a pro rata basis in the quarter.
We're really doing this on a gross basis because that's how we look at it.
Okay. 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 center, if it does cater to tourism, those are ones that continue to underperform our average. Whether it's an Orlando enclosed or outlet. In Orlando, we have an enclosed mall there, and we have the outlet centers. That market, both are underperforming 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 JC Penney deal with Brookfield and yourself. Would they be an equal partner, and at 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 we'll end up reducing our investment, both us and Brookfield, based upon the contribution they make.
Great. How do you look at Authentic Brands? You talked a little bit about selling their brands exclusively through the JCPenney outlets and increasing the JCPenney private sales, it sounds like.
Well, I didn't say necessarily exclusive, but they control a number of brands like Juicy Couture, as an example. Juicy Couture is not in JCPenney. We're going through the vendor matrix now to eventually, I think Penney will end up distributing those kind of brands that ABG controls in the JCPenney department store. It'll be a win-win for everybody.
Okay. Maybe my follow-up question with some of those brands as well, as brick-and-mortar relates to the outlet business. 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 change. Is it still going to be as reliant on apparel going forward? How does Authentic Brands fit in? Is Authentic Brands a tenant right now or a large tenant in your outlet business? Could they be in the future?
They have some brands that we're not invested in, but they do have outlet stores. Now, they don't necessarily operate those stores. Take an example. Volcom, where they're a partner with Volcom. Simon Property is not an investor in that, but they own the IP, and they own part of the operations. Volcom used to be owned by KERING Group and then sold it. Volcom itself operates outlet stores in our portfolio. They are not an operator of "stores," ABG, but they do own intellectual property of certain brands that do operate stores in our outlets. That will continue, but that's been that way for years. Again, we're not involved in everything that ABG does, like Juicy Couture and others. I do think a number of their brands do have store potential.
They'll either operate or find an operator to operate those stores. What was your other question? I'm sorry, I forgot it.
Yeah, no, the other question, David, was in regards to the apparel.
Oh, yeah.
The prevalence of apparel in apparel. Do you see that changing over time?
Yeah, look, I think generally, we're seeing a lot more interest in home furnishings and the like. We're doing a lot more deals in the outlet sector without naming names, but all the home furnishing and furniture folks. I think as you've seen that shift, generally speaking, I think we're seeing a lot of that pick up 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 the traffic at the center?
I think it's all about driving the traffic. I have no concern about that at all. Usually, those are little big boxes, so that the rent that's leaving versus the Would I rather have a Dressbarn or an RH? Okay. That's simple, right? It's those kind of trade-offs that I think are available to us. I think the mix actually will significantly improve because we're going to end up reclaiming some of the older, less relevant brands for some of 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 up a turn, understandably, since 2019. What sort of leverage do you want to target, and how would you expect this to trend in 2021?
Well, I think our leverage debt to EBITDA should decrease, right? We're generating cash. Our development spend is modest.
Yeah.
The excess cash, other than dividend, will ultimately go to reduce our indebtedness.
Yeah.
We'll sell assets. We're still looking to essentially maintain our balance sheet. That's an advantage that we've worked very hard to achieve. Hasn't been easy, and we're not going to blow that.
Yeah.
Brian, you want to add anything?
Yeah, no. Look, it'll naturally come down next year, Linda, just given the recoup of NOI relative year-over-year. You will see us come back down to a more normalistic or a level consistent with prior periods, is our expectation.
Thanks. In terms of the non-core assets that will be shed, albeit not a material impact, over what timeframe would this happen? Would you wait for some stabilization in NOI?
Well, in fact, we've got an asset now we're about to market. We're going to try and do it. We'll see. This is not earth-shattering big projects, but we expect to shed some non-core assets that not going to have a material impact, but it'll help us run the company better because we won't have to focus on it as much.
Thanks. Just one last one. In terms of the 85% collections, 3Q, do you think this will stay neutral, in the neutral territory near-term, or would you expect bigger improvements?
I would expect it to be hopefully better in Q4. We're similar in October. 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. 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. David, I was hoping you could talk a bit more about the environment for larger anchor box space specifically. I'm curious where the demand's coming from and how the spreads compare to the rest of your overall leasing. Are you able to provide any commentary at all whether you've leased any of that space to Amazon? Thanks.
Believe it or not, there's still deals to be done. We're talking to a department store to take a couple of boxes over. There's not going to be 30-40 deals, but there'll be 10-15. I think our retail community is generally, the healthier companies are looking toward the future and believe in having the right footprint, and they're going to shrink the bad stores. I think they're going to look at new opportunities. 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. We're not going to build. We're looking at plans that maybe had 60,000 sq ft, 70,000 sq ft, 100,000 sq ft of new retail small shop space. We're probably not going to program that. We'll make it up with boxes and lower investment and still manage the appropriate returns.
There's still opportunity to re-lease the space. Fact of the matter is, we still don't own a lot of it that we want. We're going to pay appropriate prices for it. 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. 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. It's going to be reprogrammed. Just something jumps out, like at Brea. We always had two anchors, but this is the old Sears store that we control. We'll still do the two anchors there, but we probably programmed 100,000 sq ft of restaurant small shops, and we're not going to do it.
We'll probably do 25,000 sq ft, 30,000 sq ft, the cost will go down, and we still think we'll have the appropriate returns on investment. There's still stuff to do to improve our portfolio, and there's still some decent demand on just box for box.
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 if any of that leasing has been specifically with Amazon?
We have no signed deal with Amazon. No.
Okay. A follow-up on the leasing spread in the quarter, down another 400 basis points sequentially to - 4% second quarter in a row. Was there anything having a disproportional impact in that calculation during the quarter? When do you think that trough, and I guess more broadly, how important do you think having a vaccine effectively at hand will be during your ongoing lease negotiations and the near-term trajectory of leases as we build back to pre-COVID cash flow? Thank you.
I think the spread is really mixed because we had some boxes that rolled out last year compared to this year. 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 rolled out, and this year, it's 12 months later, so it's really more of a mix issue. You can see that in our base rents increasing, which is probably a little more important stat.
Yep. 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 temporarily closed, like some movie theaters today, could that trigger a co-tenancy clause at your center? 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 immaterial next year. Yes.
Okay. On just the temporary point, like if a theater is temporarily closed, is that potentially an issue on that front? I know it's hard to paint with a broad brush.
No. It's an appropriate question. I think of all of the theater closures, it's one deal, and I can't remember which one, that it may affect a co-tenancy at one of the malls for a few of the boxes. It's essentially immaterial.
Okay. Thank you for that. Now that you've controlled JCPenney and you're clearly bullish on the future there, how are you thinking about the pace of potential store recaptures there at some of your better centers and even in order to pursue redevelopment opportunities over the next few years?
Well, it hasn't closed. In fact, there was a hearing today, which I did not hear. I did not hear what happened, but to approve, or it's still not done yet, so it hasn't closed. Assuming it gets approved, it'll be sometime later in the month.
Okay.
Look, it's complicated the way it's split up between what the operating company owns in real estate and what the PropCo owns. We have rights, we being Simon, have rights to recapture certain assets, so does Brookfield. 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. Eventually, there's 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 we don't feel the pressure to do that anytime soon. That'll be next year's business. Then when that happens, I get to negotiate, I guess. I don't really know with who. Maybe Rick, maybe our guy, maybe Brookfield.
I'm not really sure how it works, but 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've performed in their space to date with the COVID and how that's transpired. Have you seen traction in the various different formats? If so, what are they most attracted to from the different types of assets that Simon owns and controls?
We opened 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 the Fairway Market grocer in Nanuet with a great grocer. What we're really focused on is the specialty grocers as opposed to the big mammoth ones. I think there'll be a handful of deals. It's not going to be 50, but I think over the next couple of years, there's no reason why we can't get 10 to 20. The specialty ones, like the one we did at Boca, is great. It's at an end cap of kind of the lifestyle center that we did at Boca. High-end grocer, come in, get your prepared foods, quality.
You still have the Eataly of the world that are out there looking to do business. I had a conversation 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, dine in, or get your special consumables. I do think that'll continue to grow.
Great. Just one more 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. They're doing what they're doing. 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. David, you 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. I mean, it's a big number. I was just wondering if there's any kind of breakdown you can provide on the call.
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. If that's helpful to you. Again, 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, if that's helpful.
It is. Are you incorporating tenants on the watch list that are not bankrupt or not near-term bankrupt?
Credit provisions include lots of things beyond just pre-petition rent or anything else associated with a bankruptcy.
Okay. 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. Listen, before the news today, we were feeling better that we had dealt with a lot of crap in Q2 and Q3 and we're here and our cash flow's dramatically up and our collections are up, and we're getting our business back to normal. We were headed that way anyway. Obviously, this situation is a 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 infected. Maybe there's a little more of a, what's the phrase?
Pep in the step.
Pep in the step. I just think it's good news. Let's hope we can get out and get done. No, it's not going to affect us. We're mostly dealing with COVID-oriented shutdowns or impact of those shutdowns. Listen, I hope it gives our client base more confidence, and that's fine. That's good. It should. Hopefully we'll see some benefits from that into 2021 and beyond.
Okay. Thank you.
Sure.
Thank you. This does conclude the question and answer session 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.