Simon Property Group - Q4 2023

Transcript

Operator (participant)

Greetings, and welcome to the Simon Property Group Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Ward, Senior Vice President, Investor Relations. Thank you, Tom. You may begin.

Tom Ward (SVP of Investor Relations)

Thank you, Paul, and thank you everyone for joining us this evening. Presenting on today's call are David Simon, Chairman, Chief Executive Officer, and President, and Brian McDade, Chief Financial Officer. A quick reminder that statements made during this call may contain forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing.

Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call this evening will be limited to one hour. For those who would like to participate in the question-and-answer session, we ask that you please respect the request to limit yourself to one question. I'm pleased to introduce David Simon.

David Simon (Chairman, CEO, and President)

Good evening. Thanks, Tom. Before turning to the results, I would like to provide some perspective on our company as we celebrated our 30th anniversary as a public company mid-December of last year. We have grown our company into a global leader of premier shopping, dining, entertainment, and mixed-use destinations, managing through, and in some cases, very turbulent times. Over the last three decades, from our base of 115 properties in 1993, we have acquired approximately 300 properties, developed more than 50, and disposed of approximately 250, resulting in our current domestic portfolio of about of 215 assets.

We expanded globally and today have 35 international outlets, including world-renowned outlets in Asia, and our portfolio is differentiated by product type, geography, enclosed and open-air centers located in large and dense catchment areas. Our portfolio is supported by the industry's strongest balance sheet and a top management team. We are the largest landlords, the world's most important retailers, and not by accident. Our diversified tenant base has solid credit, and our mix is always changing and adapting, best illustrated by the fact that compared to 30 years ago, only one retailer is still in our current top 10 tenants. Our team's hard work has resulted in industry-leading results, including some of the following: Our annual revenue increased from $424 million to nearly $5.7 billion.

Annual FFO generation increased 30 times from approximately $150 million to nearly $4.7 billion, a 12% CAGR. Total market capitalization has increased from $3 billion to $90 billion. We have paid over $42 billion in dividends to shareholders. We have assets in our portfolio that have been in business for more than 60 years. Those assets are still growing today, with many generating $100 million in NOI. These assets are in great locations, have a loyal and large customer base, and are where the retailers want to be. No other asset type has the longevity, including the NOI generation and embedded future growth that these assets have. Yes, they change. Yes, they evolve. Yes, they adapt, but yes, they also grow.

Our collection of assets cannot be replicated, and there are hidden, always hidden opportunities within them, within them. I want to thank the entire Simon team, who have contributed to 30 years of success as a public company. Now let me turn to our fourth quarter 2023 results. We generated approximately $4.7 billion in funds from operations in 2023, or $12.51 per share, and returned $2.9 billion to shareholders in dividends and share repurchases. For the quarter, FFO was $1.38 billion, or $3.69 per share, compared to $1.27 billion, or $3.40 per share. Let me walk you through some of the highlights for this quarter compared to Q4 of 2022.

Domestic operations had a terrific performance this quarter and contributed $0.28 of growth, primarily driven by higher rental income with lower operating expenses. Gains from investment activity in the fourth quarter were approximately $0.07 higher in a year-over-year comparison. Other platform investments had $0.03 lower contribution compared to last year. FFO from our real estate business was $3.23 per share in the fourth quarter, compared to $2.97 from last year. That's 8.7% growth and $11.78 per share for 2023, compared to $11.39 last year. Domestic property NOI increased 7.3% year-over-year for the quarter, and 4.8% for the year. Continued leasing momentum, resilient consumer spending, operational excellence delivered results for the year exceeding our initial expectations.

Our NOI ended the year higher than 2019 pre-pandemic levels. Portfolio NOI, which includes our international properties at constant currency, grew 7.2% for the quarter and 4.9% for the year. Mall and outlet occupancy at the end of the quarter, fourth quarter, was 95.8%, an increase of 90 basis points compared to last year. The Mills occupancy was 97.8%. Occupancy is above year-end 2019 levels for all of our platforms. Average base minimum rent for malls and outlet increased 3.1% year-over-year, and the Mills rent increased 4.3%. We signed more than 960 leases for approximately 3.4 million sq ft in the fourth quarter. For the year, we signed over 4,500 leases, representing more than 18 million sq ft.

Approximately 30% of our leasing activity for the year were new deals with going-in rents of approximately $74 per sq ft, and renewals had going-in rents of approximately $65 per sq ft. Leasing momentum for the last couple of years continues into 2024. Reported retailer sales per square foot in the quarter was $743 for malls and outlets, combined, and $677 for the Mills. During the quarter, we sold a portion of our interest in ABG for gross proceeds of $300 million in cash and reported pre-tax and after-tax gains of $157 million and $118 million, respectively. We opened our eleventh outlet in Europe last year. Construction continues on 2 outlets, one in Tulsa, Oklahoma, and one in Jakarta, Indonesia.

We completed 13 significant redevelopments and will complete other major development projects this year. In addition, we expect to begin construction this year on 5-6 mixed-use projects, representing around $800 million of spend, from Orange County to Ann Arbor, to Boston, to Seattle, to Roosevelt Field, are some of the ones that are planning to start this year. We expect to fund these redevelopments and mixed-use projects with our internally generated cash flow of over $1.5 billion after dividend payments. During 2023, we completed $12 billion in financing activities, including 3 senior note offerings for approximately $3.1 billion, including the Klépierre exchangeable offering. We recast and upsized our primary revolver credit facility to $5 billion and completed $4 billion of secured loan refinancings and extensions.

Our A-rated balance sheet is as strong as ever. We have approximately $11 billion of liquidity. During 2023, we paid, as I mentioned earlier, $2.8 billion in common stock dividends. We repurchased 1.3 million shares of our common stock at an average price of just over $110 per share in 2023. And today, we announced our dividend of $1.95 per share for the first quarter, a year-over-year increase of 8.3%. The dividend is payable on March 29th of 2024. Now, moving on to 2024, our FFO guidance is $11.85-$12.10 per share.

Our guidance reflects the following assumptions: domestic property NOI growth of at least 3%, increased net interest expense compared to 2023 of approximately $0.25-$0.30 per share, reflecting current market interest rates on both fixed and variable debt assumptions and cash balances, contribution from other property, other platform investments of approximately $0.10-$0.15 per share, no significant acquisition or disposition activity, and our current diluted share count of approximately 374 million shares. So with that said, it's safe to say we're excited to enter year 31 as a public company. Thank you for your time, and we're ready for Q&A.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)

Thanks. Good evening, David. I was just wondering if you could maybe talk a little bit about kind of the leasing pipeline and where things stand today versus maybe the year ago, and you know, what sort of conversations are you having with the tenants, and maybe how has the pricing dynamic changed, given that you're now kind of 95% leased and pretty full in the portfolio?

David Simon (Chairman, CEO, and President)

Well, I mean, Steve, we're always adjusting our mix. We're always trying to, so even though we're 96% leased, thereabouts, we're always looking to improve our, you know, our, our retailer mix. And, you know, obviously, that's beneficial to our NOI growth. I would say just generically, you know, and obviously, I spend a lot of time myself on leasing, and with my team on leasing, demand remains very strong. And, there is a real interest by all sorts of retailers and, you know, people that populate our shopping centers to be part of what we're doing. So, I think as, as you probably saw, our new deals are $74 a foot, thereabouts, our renewals are $65 a foot.

Our expiring leases this year are in the 56-57 range, so, you know, we're seeing generally positive spreads. Supply and demand is in our favor. Historically low supply in big properties across the, across the country. I mean, there used to be 40 million sq ft of retail real estate built every year. Now there's essentially, you know, less than a few million here and there. So, uh, and then there's been obsolescence, too, which makes the supply shrink as well. So, and then there's just great new retailers that we're very excited to do business with. I was on the West Coast, seeing some of them. The importance of brick-and-mortar has never been higher.

And, you know, the cost of—all of the things that we said about, you know, don't, don't get me wrong, e-commerce is critically important, but, but all of the stuff about e-commerce, cost of customer acquisition, returns, you know, stickiness, et cetera, all is, continues to be a challenge. If you've looked at the marketplaces, that pure online, they've run into problems, so you really—they really need to be connected to a bricks and mortar, for sustain—for, you know, survivability. So all of those, all of those things are pointing to a positive picture. It's a function of execution, a function of, you know, being first, a function of continuing to improve our properties, you know, which we're very focused about.

But, you know, even though we've bounced back and had a couple of really good years in terms of lease up, you know, from the depths of the pandemic, we're not finished, and retail demand, you know, continues, and it's strong, and it's across the board. I mean, it is not one category, one retailer, but, you know, but pretty much across the board.

Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)

Thanks. That's it.

David Simon (Chairman, CEO, and President)

Thank you, Steve.

Operator (participant)

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

Caitlin Burrows (VP and Senior Equity Research Analyst)

Hi, good evening, everyone. David, could you give some more detail on the ABG sale that you referenced, maybe how much you still own, how much you think your remaining OPI could be worth, and whether you plan to monetize more in 2024, or maybe what could influence that decision?

David Simon (Chairman, CEO, and President)

Sure. Well, let me just, uh, we sold about 2% of our ABG stock. So we essentially went from just under 12 to just under 10. And, you know, we'll continue to look to monetize these investments. They've been, by and large, very good investments across, you know, not just the big ones, but the smaller ones as well. You know, obviously, there's a number of them that are synergistic to us. But, you know, we have a strict adherence to creating value. And, if we think we can deploy that capital into kind of what I'd call the mothership, and get better growth from that, then that's where our number one priority will be.

So, and it wouldn't surprise me, Caitlin, for us to continue to, you know, monetize, obviously the uhm, you know, some of these are, you know, bigger value, bigger investments, so it's not, you know, that easy to, you know, to do it in one big swoop. But, we're very focused on portfolio management of those assets, and, if we can monetize them, are we gonna get a better return plowing it back into our core business?

Caitlin Burrows (VP and Senior Equity Research Analyst)

Got it. Thanks.

David Simon (Chairman, CEO, and President)

Yeah, thank you.

Operator (participant)

Our next question is from Jeff Spector with Bank of America. Please proceed with your question.

Jeff Spector (Managing Director)

Great, thank you, and first, congratulations on the anniversary. David, there's a lot, a lot of initiatives. So as you think about the next five years, I know it's probably a difficult question, but is there one or two key initiatives that you're most excited about as you think about the next five years?

David Simon (Chairman, CEO, and President)

Well, it, you know, look, I, I'd say a couple of things. On the property level, there's no question that all of the mixed-use stuff that we're bringing in, plus the redevelopment of our department store boxes, are probably the most, you know, interesting and exciting things that we're doing on the ground level. So that would certainly be number one. Number two is, we're very excited about growing our outlet business in Southeast Asia. It's an incredibly robust market, young, a young population and a growing. And I'm not. When I say Southeast Asia, I'm not, you know, like in Jakarta. Places like that, where, you know, it's not China, it's places like that, where we see kind of what we can do in Japan and in Korea on the outlet side.

Jeff, you probably know that better than anybody, based on your previous history with, you know, in terms of that. So, that's very exciting. I'd also say we still are in the pursuit of bringing technology to our loyal consumers that allow them to enhance their shopping experience with us. So, we've got a lot of initiatives on the marketing, loyalty. You know, Simon Search is a great example where, you know, our consumer, either in property or pre-visit, can search our tenant base for what, if they're looking for a black dress, where in the center can I buy it, and what retailer? Obviously, that ties into the marketplace we're building, with Premium Outlets.

There'll be some news there this year on that front. So that whole, you know, that whole echo, that whole system about customer interaction reinforcing their shopping behavior, rewarding loyalty, expediting their trip and making it more useful, you know, is a big focus. And then as important, I think this is number four, really, is just we've got to do a great job of continuing to evolve our retailer mix. The exciting thing is, you know, there are more and more entrepreneurs, there are more and more exciting retailers that are coming up with great concepts, proving them out, and then realizing that, you know, our centers are a good place for them to do business. So those are the ones that come to mind, but I'm certain there'll be ones that I haven't even thought of.

Jeff Spector (Managing Director)

Very helpful. Thank you.

David Simon (Chairman, CEO, and President)

Thank you, Jeff.

Operator (participant)

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

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Hey, good evening. Good evening out there, David. So I think at the opening, you mentioned that NOI is now exceeding pre-pandemic. The dividend is within less than 10% of pre-pandemic. You know, thinking about Jeff's and Steve's questions on reinvestment, as you think about getting back to that pre-pandemic dividend level, given the investment opportunities, especially lack of supply, growing demand, you know, people are once again really engaged in physical retail, does that change your trajectory as you think about getting the dividend back to pre-pandemic, meaning, are there better investment opportunities with that capital, or is the delta really a function of rising interest rates that's, you know, meaning that the surpassing pre-pandemic NOI versus the dividend is really just a function of the higher interest expense now?

David Simon (Chairman, CEO, and President)

Well, I mean, Alex, look, our yield is ridiculously high, okay? So that's really, I mean, we could financially pay 2.10 tomorrow, right? So we have $1.5 billion of free cash flow after our dividends. So it's it has nothing to do with financial wherewithal. You know, I mean, we would like our we would like, you know, we don't like trading at this high a yield. So, so I think, I think that's kind of how we look at it. We still think as we have these, you know, additional capital events, we still are, you know, anxious to continue to buy our stock back.

And again, when I look at the either the S&P 500, I look at the REIT peer group, I look at, you know, what, what the strip center REITs. You know, our yield is plenty high for investors. So, tell my, tell all of my investors, I could pay $2.10 tomorrow evening, okay? Per quarter, without, without a blink, but our yield is too high, and, you know, it'll be there before you know it, but we would like to trade at a little lower yield. Because, you know, we think, you know, it, certainly, if you look at it on that basis, you know, our yield is, is higher than it should be. I mean, the S&P is under 2%, our REIT strip centers, Tom, are in the 4s. You know, we're close to 7%, right?6.5-7? I mean, you know, Alex, you should be pounding the table.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Yes, unfortunately, I'm a non-paying customer. The real customers are the ones listening to the call. We're just asking the questions.

David Simon (Chairman, CEO, and President)

No, I'm kidding. No, by the way, we are, just so you know, we like your, you know, welcome out there. We are west of the Hudson, but we're not going to tell you exactly where we are, okay?

Alexander Goldfarb (Managing Director and Senior Research Analyst)

I'm wearing-

David Simon (Chairman, CEO, and President)

We may not be in Indiana tonight, but we are west of the Hudson.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

I assume you'll be in Las Vegas this Sunday.

David Simon (Chairman, CEO, and President)

Well, I can't tell you my schedule.

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Thank you.

David Simon (Chairman, CEO, and President)

Sure.

Operator (participant)

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

Michael Goldsmith (Director and Equity Research Analyst)

Good afternoon. Thanks a lot for taking my question. David, base minimum rents are up healthily in the low single-digit range year-over-year, while your tenant sales per square foot are down slightly. So can you just talk a little bit about these dynamics? Is that a reflection of your rents kind of catching up to some of the strength the tenants have experienced before their sales have started to come down? And just how long are these dynamics kind of sustainable like this? Thank you.

David Simon (Chairman, CEO, and President)

Sure. Good, good question. So I will say this, I think the rent, the going-in rents, renewals, or, new leases are very much sustainable. If you look at our occupancy costs, they're still, you know, at the low end of our historical range. I mean, we're at 12.6, and, you know, we have run up to 14+ % before. And I would also give, uh, I would also, caution, you know, report, you know, these are the sales that our tenants are reporting to us. But they are somewhat affected by, you know, returns they get, and so on. We actually think our sales per foot are higher than this. Some cases, they have the ability to, offset, returns, and most cases, they don't.

So I just put that out there, so I wouldn't, you know, and I mentioned this maybe two, three years ago, probably certainly pre-pandemic, but we report it. I know the market likes it. We actually think our sales are higher, they come from our properties, and then they're somewhat affected by returns. And we think some of, a lot of those returns are internet sales returns, so they don't even come from our properties. And so, again, when we look at it, we feel like supply and demand, low occupancy cost, high retail sales, and just overall demand will be able to generate kind of the, the, the new leasing and renewal spreads that, that we've seen over the last couple of years.

Michael Goldsmith (Director and Equity Research Analyst)

Thank you very much.

David Simon (Chairman, CEO, and President)

Sure.

Operator (participant)

Thank you. Our next question is from Floris Van Dijkum, with Compass Point. Please proceed with your question. Floris, is your line on mute?

David Simon (Chairman, CEO, and President)

Floris? Looks like we lost Floris. Why don't we go on, and we'll have all. Yeah, sure.

Operator (participant)

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

Craig Mailman (Director and Equity Research Analyst)

Hey, guys. Just going back to maybe the reinvestment theme here. You know, you guys have plenty of cash after the dividend. And I'm just kind of curious, at this point, what is the level of anchor box reinvestment you guys think you need to do, just given what may be vacant today? And, you know, after you guys were spared kind of some of the recent Macy's closings, but just as you look at the portfolio today, kind of what do you think over the next two, three years, you guys can ultimately get back and have to retenant? And just, you know, you talked a lot about how the leasing environment is good. Just what's the outlook for retenanting those boxes today? What's the targeted kind of makeup there, and is luxury still doing enough to be able to be the primary kind of backfill option?

David Simon (Chairman, CEO, and President)

Well, Craig, on the department store boxes, I don't have it off the top of my head, but the ones that we own, we basically don't have a ton of work to do. We have a handful of boxes that we own, that are in, you know, process, like, for instance, and I mentioned Brea just briefly on the call. You know, where that was a former Sears store. We tore it down. It's in development now, under construction now. So the actual stores that we own are not many, probably under 10 at this point, that are either currently under construction or in process.

So, you know, very small amount of, you know, kind of, less of an opportunity than you'd think. The ones that we, you know, Transformco still owns some boxes, and so does Seritage. So you know, we'll, in our property. So we'll see how that evolves. I mean, eventually, some of those could be opportunities for us to buy and redevelop. We haven't made deals on those just because then the ask has been, you know, too great. But, we find, and I don't think luxury is really gonna be the dominant theme on a lot of these mixed-use or I'm sorry, on these, you know, boxes. I think a lot of it will be, continue to be the mixed-use development that we're doing.

You know, obviously opening up, if it's an enclosed mall, opening the center up with restaurants and entertainment and so on, has worked very well. So we have a number under construction or about to be under construction, but we don't really have that existing pipe that until we make more deals to buy some of the boxes back. It's not as big as you might think, and it's only a handful. Now, Macy's, you know, as you're right, they're—they announced some store closings, none of which are ours. So, you know, we're always very focused on knowing exactly where we might be at risk. So, and I would point out, and very importantly, when Sears went out of business, the whole market said: How are you going to survive, you know, Sears going out of business?

You know, they had 800 department stores at that time. I think, frankly, they're down to, believe it or not, operating maybe five, six, seven, eight. I think we actually have, you know, the most between us and the Taubman portfolio. But how are you going to survive it? The fact of the matter is, it was a non-event to the mall customer. And if anything, as we've gotten those boxes back, we've made the center better. So, as we look, we don't look at box, you know, the changes in box as a concern. We view it really more aggressively and progressively as something that will enhance the property's portfolio. And the assets that we were worried about that couldn't survive that basically don't exist in our portfolio anymore. So if you asked me that question 10 years ago, I might have a different answer.

Craig Mailman (Director and Equity Research Analyst)

Great. Thank you.

David Simon (Chairman, CEO, and President)

Greg, I hope you get better prior to the Citi Conference. I'm sure you will, but you sound like you've lost your voice.

Craig Mailman (Director and Equity Research Analyst)

Yeah, I'm hoping to be on the mend by then. Thanks, David.

David Simon (Chairman, CEO, and President)

All right. Be well.

Operator (participant)

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

Vince Tibone (Managing Director)

Hi, good evening. Could you help me better understand how much incremental FFO we should expect in 2024 from development or redevelopment projects that stabilize either later in 2023 or slated to be finished in 2024? Does any color to help us better understand the timing of incremental NOI and FFO from, you know, all the development activities would be helpful.

David Simon (Chairman, CEO, and President)

Yeah, in fact, it's interesting. You actually take a step back. I think in 2024, we're taking a step back. I think I'll just give you a, you know, a trivial example. I mentioned Brea now for the third time, but, you know, we have a whole wing that's connected to the former Sears department store that we're redeveloping. We'll have some outdoor shops. We're building, you know, a Dick's Sporting Goods. We have a Life Time Fitness Resort, and then we'll do, uh, roughly 350 apartments or so. But that wing leading to Sears, we've had to de-lease it to ultimately put in, not sure I'm allowed to say it, but I'll say it anyway, Zara and Uniqlo. And they won't open until end of 2024, best case.

That's, by and large, all of the stuff in the 8-K that we've listed, and I don't believe Brea is in there. If it is, it'll be in there shortly. None of that really gets in 2024. You know, we do have Tulsa opening in the late summer. That'll have a marginal impact. Leasing there is going well. But with all the redeveloping, you know, this is really more of a 2025.6 story. And you know, the one that we'll see the benefit of this year, and I don't have a number handy, is Phipps, you know, where we opened, you know, in 2023. You know, that's kind of the one that I would say most, you know, most meaningful of it. But most of the redevelopment is a 25-26-story.

Vince Tibone (Managing Director)

No, that's really helpful. I mean, is there any, like, for just in terms of, you know, the, I guess, the $1.3 billion that's active today, plus the $800 million you're gonna start, I mean, what's a fair assumption for 2025, 2026 in terms of level of maybe spend stabilizing? I mean, that's at least how we model it. Like, is $500 million stabilizing annually at, you know, let's call it 7%-8% yield, a fair assumption, or that, and that's something I'm trying to get at, like, how quickly-

David Simon (Chairman, CEO, and President)

Yeah.

Vince Tibone (Managing Director)

Things come up.

David Simon (Chairman, CEO, and President)

No, I appreciate, I appreciate that. If you don't include what I saw as ground-up new development, I would say probably about between $600 million and $800 million a year. Our goal would hopefully be, you know, to bring that in at north of 8%. Obviously, if, if it is multifamily, you can still create value at a lower, at a lower yield than that. And in some cases, you know, we're building at a lower yield than that. Like, for instance, both Brea's apartments and the ones that we're building at the former Northgate Mall, where we're basically about to start construction there, you know, will be sub-8%, so it may, it may, um, you know, may, round down that 8%, but if you're talking kind of everything else, we would hope to be north of that.

Vince Tibone (Managing Director)

Thank you. That's all really helpful color. Appreciate it.

David Simon (Chairman, CEO, and President)

Sure.

Operator (participant)

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

Ron Kamdem (Head Managing Director)

Great. Just, a two-parter really quickly, starting with the core NOI. Just in 2024, can you just touch on the tourist centers and how much recovery there is and, and how much upside is providing to 2024, as well as the variable to fixed conversion? Just trying to get a sense of how much of a tailwind that is to the core. And then on the sort of other platform investment, maybe could you just touch on what seasonality should we be thinking about between sort of the first part of the year and 4Q? Thanks so much.

David Simon (Chairman, CEO, and President)

Sure. So, and Brian will chime in here. I'll just give you some thoughts off the top of my head, and then Brian hopefully will agree or correct me. So I would say, we saw in 2023 a really decent bounce back from the tourist centers. Now, I'll give you a great example. And I was just having to look at this. I must have been probably doing my job, but I noticed in Q4, Q4, as an example of the bounce back, Woodbury Q4 sales were around $350 million, okay? Which, to me, is a real good indicator of bounce back and obviously the highest fourth quarter sales we've had there in, you know, in quite some time. So I'd say generally, we're seeing a really good bounce back in the tourist centers.

You know, I don't think we're— You know, the one area that, you know, the U.S. overall and obviously will, you know, have an impact on us. I do not think we'll see the Chinese, we do not expect the Chinese to come back, you know, the way they had before pandemic. And just our tourist centers did outpace our sales for the portfolio for 2023 on average. So good bounce back across the board. And then I would say on your variable rent, we continue to see that as a lower % of revenues, both uhm, you know, the vast majority, I think we increased our, you know, the way to think about it, that's interesting is, and again, hopefully, Brian won't need to correct me, but Brian's available to correct me.

Our domestic operations had $0.28 of improvement, Q over Q. That's $0.28, and within that $0.28, our variable income went down. So I think that gives you a kind of a leading barometer. We're still working that way down, and we're getting that into kind of our base rent. So and then your final on OPI, a loss Q1, relatively flat, Q2, Q3, and then most of it in Q4. Q2 is a little better than Q3 usually, but on the margins. And we're only projecting this year $0.10-$0.15. All right. How'd I do?

Ron Kamdem (Head Managing Director)

You got it. Thanks so much.

David Simon (Chairman, CEO, and President)

Sure. Thanks, Ron.

Operator (participant)

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

Greg McGinniss (Director and Equity Research Analyst)

Hey, good evening, David. I just want to dig into the guidance a bit and that OPI that you just cited in particular. Is it fair to assume that the $0.10-$0.15 includes gains or monetization similar to last year, or operations expected to improve from the -$0.02 contribution to FFO in 2023?

David Simon (Chairman, CEO, and President)

Yeah, thank you for that question, and the answer, no, that's pure operations, and no, you know, one-time or, you know, sale gains or any of that are in there. And, yeah, I mean, just by I mean, we had, you know, we had a tough 2023 in OPI. You know, we saw uh, we didn't meet our, both our budgeted expectations and our, you know, our, our expectations. It's kind of big year when we recalibrated it. The team and OPI, you know, again, we're partners with, so it's not just us, you know, we're partners are making significant efforts within their own business to improve performance. And again, the overriding theme was, you know, the, and, and, you know, we should be sensitive to this across the board.

The overriding theme was the lower income consumer, still, you know, with inflation embedded, even though inflation has subsided. They're still dealing with things that cost a lot more money than they used to. And the good news is their income is increasing, but it's still not in a position that they have the discretionary income that they need and they deserve. And, you know, we need to figure that out as a country.

Greg McGinniss (Director and Equity Research Analyst)

Just to clarify-

David Simon (Chairman, CEO, and President)

So no. Yeah, so hopefully, I answered. So no one-time gains. Hopefully, we're being conservative, and that's kind of where the numbers are. And, you know, just to take a step back, we're kind of getting OPI in this level where it was pre the extraordinary year of 2021, 2022. If you go back in time, this is kind of where the number was. Nobody cared. You know, we had—we really outpaced ourselves, in that extraordinary 2021 and 2022, and I think now we're kind of getting back to more, you know, a kind of a more stabilized number.

Greg McGinniss (Director and Equity Research Analyst)

Mm-hmm. So just to clarify, so there's gonna be some improvements in operations, I guess, that are gonna be kind of driving this year-over-year growth. But what do you think that implies in terms of the operational standpoint and the customer for your other tenants in the portfolio? How are those retailers performing, and are they gonna be able to make the same sort of operational changes to benefit income?

David Simon (Chairman, CEO, and President)

Well, you're, you're just talking about our tenant base now? Is that the question, or-

Greg McGinniss (Director and Equity Research Analyst)

I guess, I guess J.C. Penney-

David Simon (Chairman, CEO, and President)

The ones that-

Greg McGinniss (Director and Equity Research Analyst)

Plus your tenants, yeah.

David Simon (Chairman, CEO, and President)

Okay. Okay. Well, though, like I said, the ones in, in, you know, and, and the ones in SPARC and, and Penney, I really spoke to. I mean, I think, you know, generally, the plan that with that, they have in place, you know, we're, you know, we think we're on the right track, and we're, you know, all working very hard to produce these results, and, and hopefully, we'll do better than that. Again, I mentioned to you, we're kind of getting back to where we used to be. And if you looked at it in, in conjunction with pre-pandemic 18, 19, that's kind of where the number was.

You know, we really outperformed in 2021, 2022, and we really underperformed in 2023. Simple as that. Brands are good. Businesses are have the right game plan, and we're moving. So that's SPARC, Penney. Any questions on that? Now then I'll move to your other questions. I mean, you know, retail is very specific, so you know, I think our retailers, they're generally, and the credit is in really good shape. There's always one or two or three tenants that we are somewhat nervous about. But you know, they're they all understand the importance of bricks and mortar. They're reinvesting in their stores.

They're spending less on, you know, technology, which is good for us, putting more money back in the stores, and they're open to buying, and their return on investment in stores is a proven financial model. They're doing that, so I'd say, generally, comfortable, very comfortable with all the retailers that we're doing business with. There'll always be a couple here and there that, you know, have to sort through their, you know, their financial, you know, financial issues.

Greg McGinniss (Director and Equity Research Analyst)

Great. Thanks for the color, David.

David Simon (Chairman, CEO, and President)

Sure. Thank you.

Operator (participant)

Our next question is from Hong Zhang with J.P. Morgan. Please proceed with your question.

Hong Zhang (VP and Equity Research Analyst)

Yeah. Hey, guys. I guess I was wondering if you could quantify the magnitude of the development drag this year. And also, it seems like you saw a very strong rent and occupancy growth in the Taubman portfolio in the fourth quarter. I was wondering what drove that and what are your expectations for that portfolio this year as well?

David Simon (Chairman, CEO, and President)

Just on Taubman, I mean, our, their, our expectations on the comp NOI are roughly right on, you know, the, you know, in excess of 3%. What drove both portfolios really is, you know, supply and demand, healthy retail sales, operational excellence, all the things that I mentioned earlier. So, listen, we're a big company. We did have some drag from redevelopment, but, you know, it's not, you know, it's not an excuse. We don't worry about it. It, there, you know. And it's not so much big redevelopment. You, you, you know, when you, when you retenant a mall, you have downtime. And as I've mentioned this before, the better the tenant out, the better the tenant, the better the build-out.

In some cases, build-out is 6-9 months, and restaurants, you know, can be even close to a year. And as you know, we have our portfolio of restaurant new business is at least 100 new restaurants over the next year or so. So, you know, it is a long, arduous process getting permits. You know, I mean, we had a crazy thing in the Bay Area, where they couldn't hook up to gas for a while. Encourage you to read the Supreme Court overruling of an ordinance in Berkeley that affected Palo Alto. But, you know, if you're really bored, you can read it. We finally got gas back into the center.

You know, as you know, chefs like to cook with gas, so it was a, you know, it cost us six months and a delay. I mean, that's normal. But I'd say the bigger issue on, you know, just, it's not so much redevelopment as really retenanting. And I would say, by and large, if I had to make up a number, it costs us probably $0.10-$0.20 a year of just downtime. But that, that's a, that's a guess.

Hong Zhang (VP and Equity Research Analyst)

Got it. Okay. Thank you.

David Simon (Chairman, CEO, and President)

Thank you.

Operator (participant)

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

Ki Bin Kim (Managing Director and Senior Equity Research Analyst)

Thank you. Just a couple questions. First, your operating expenses were down in fourth Q. I was just curious what drove that and if that's sustainable?

Brian McDade (CFO)

Yeah, Ki Bin, it's Brian. Yeah, we did see some savings, year-over-year. There was some seasonality to it. Weather was a little bit lighter. But yes, we do expect it's sustainable.

Ki Bin Kim (Managing Director and Senior Equity Research Analyst)

Okay. On the ABG, partial sale, was that a down round valuation versus the $18 billion mark previously?

David Simon (Chairman, CEO, and President)

No.

Ki Bin Kim (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

David Simon (Chairman, CEO, and President)

Yeah, remember that that was enterprise value. They have some debt, so that was an equity value. But uhm, so just when you say $18 billion, that's enterprise value as opposed to equity value. Okay?

Ki Bin Kim (Managing Director and Senior Equity Research Analyst)

Okay, thank you.

David Simon (Chairman, CEO, and President)

Sure. No problem.

Operator (participant)

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

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

Hey, good evening out there.

David Simon (Chairman, CEO, and President)

How are you?

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

I'm doing great, sir. Hope you're well, too. The question I have is on your signed but not yet open pipeline. I think last quarter, or you previously outlined, there's about 200 basis points of embedded occupancy from that signed but not yet open pipeline. So maybe you can give us an update on where that stands today, and then also maybe what's embedded in the guide for bad debt and lease term fees this year. Thank you.

Brian McDade (CFO)

Sure. So, signed but not opened, a little bit north of 200 basis points. We've been kind of holding that, as we open stores and sign new leases, so we're holding steady around 200 basis points. We are assuming a normal level of bad debt, which is about 25 basis points of total revenue, would be our expectation on that.

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

Lease term fees?

Brian McDade (CFO)

Normal rate of lease term fees, I think the answer, the number for the year is about $30 million. The estimate.

David Simon (Chairman, CEO, and President)

Okay. Thank you.

Operator (participant)

Our next question.

David Simon (Chairman, CEO, and President)

Uh, operator-

Operator (participant)

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

Juan Sanabria (Managing Director)

Hi, good evening. Just a quick one for me. Just curious on the current state of affairs with Jamestown and how that relationship is progressing. More talk about mixed use, so just curious if there's anything in the works or in the planning stages that you're doing with them and how you're thinking about that particular relationship. Thank you.

David Simon (Chairman, CEO, and President)

Yes, thank you. So, we're - we haven't quite had a year under our belt, but we're very pleased with the relationship and the partnership. And you know, we continue to look at opportunities both within our pipeline and obviously what they do on behalf of investors. So, a lot of good feedback going both ways. And you know, we haven't, you know, we're working on one project. You know, I mean, we have one development project we're working on together, but other than that, it's a lot of corporate, you know. It's more strategic and more corporate discussion than property-level specifics, other than one where we are partners on and going through a development process in that now in the Southeast.

Juan Sanabria (Managing Director)

Thank you.

David Simon (Chairman, CEO, and President)

Sure.

Operator (participant)

There are no further questions.

David Simon (Chairman, CEO, and President)

Okay

Operator (participant)

At this time, I'd like to hand the floor back over to the management for closing comments.

David Simon (Chairman, CEO, and President)

Okay, thank you. And, obviously, Tom and Brian are available, and we really appreciate everybody's participation. Talk to you soon.

Operator (participant)

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