Simon Property Group Inc (SPG) — Q3 2024 Earnings Call Transcript

Thank you, Paul. Good morning and thank you for joining us today. 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 be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995. An actual result 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 morning will be limited to one hour. For those who would like to participate in the question-and-answer session, we ask that you please respect our request to limit yourself to one question. I am pleased to introduce David Simon.

Good morning, everybody. And I’m pleased with our financial and operational performance in the third quarter. We saw increased leasing volumes, occupancy gains, and total retail sales volumes. Demand for our space from a broad spectrum of tenants is strong and steady, and we continue to strengthen our unique retail real estate platform through our growing development and redevelopment pipeline. This, combined with our A-rated balance sheet, really sets us apart and allows us to focus on the future. We raised our dividend again to $2.10. We’re now at our historical high, overcoming the arbitrary and capricious closing of our real estate during COVID. We have a low payout ratio. I’m going to now turn it over to Brian, who will cover our third quarter results and full year guidance in more detail, Brian.

Thank you, David, and good morning. Real estate funds from operations were $3.05 per share in the third quarter, an increase from $2.91 the previous year, reflecting a growth rate of 4.8%. Our domestic and international operations performed well, contributing $0.15 of this growth, primarily due to a 3% rise in lease income. The third quarter funds from operations totaled $1.07 billion or $2.84 per share, compared to $1.2 billion or $3.20 per share last year. This quarter's results accounted for a $0.13 per share non-cash net loss and fair value adjustments related to the Klépierre exchangeable bonds issued in November 2023, maturing in November 2026. The non-cash loss on derivatives resulted from Klépierre's stock price surging 18% during the quarter. Consequently, our Klépierre investment's market value increased by about $400 million in the third quarter. Our operating property income saw an eight-cent loss due to decreased discretionary spending from lower-income consumers at two SPARC brands, along with lost income from ABG last year following the sale of our interest earlier this year. For reference, last year's results included $0.32 per share in non-cash gains from the partial sale of our SPARC ownership in the third quarter of 2023. Domestic net operating income rose 5.4% year-over-year for the quarter, driven by strong leasing momentum, resilient consumer spending, and operational excellence, leading results to surpass our quarterly plan. Portfolio net operating income, including our international properties at constant currency, grew by 5% this quarter. Malls and outlet occupancy at the end of the third quarter was 96.2%, a 1% increase year-over-year, while Mills occupancy stood at 98.6%. The average minimum base rent for malls and outlets increased by 2.3% year-over-year, and The Mills rose by 4.5%. Leasing momentum remained strong across the portfolio, with approximately 1,200 leases signed for 4 million square feet this quarter. In the first nine months of 2024, we signed over 3,900 leases for 15 million square feet, expected to generate more than $1 billion in revenue. We also have an additional 1,800 deals in our pipeline, including renewals that could yield over $600 million in revenue. Demand from the retail sector continues to be robust with significant strength in many categories. Reported retailer sales per square foot for the combined Mall and Premium Outlets was $737, marking a roughly 1% increase year-over-year when excluding two retailers. Notably, total sales volumes, also excluding those two retailers, rose about 1.5% year-over-year. At the end of the quarter, our occupancy cost was 12.8%. In terms of new development and redevelopment, we opened the Tulsa Premium Outlets on August 15th, fully leased, and a significant expansion at Busan Premium Outlets in South Korea was completed in September. By the end of the quarter, we had new development and redevelopment projects underway across all platforms in the U.S. and internationally, with our share of net costs at $1.3 billion, achieving a blended yield of 8%. Regarding other platform investments, our operating property income results for the third quarter at SPARC fell short as lower-income consumers remained cautious with their spending. We first noted the inflationary impact in the latter half of 2022 for this demographic. Performance for Forever 21 and Reebok was below expectations. However, SPARC and J.C. Penney did show sequential improvements in comparable sales during the third quarter, positioning these brands favorably for the important upcoming holiday season. We are actively working on positive announcements related to these businesses by year-end. On our balance sheet, during the quarter, we amended and extended our $3.5 billion supplemental revolving credit facility for three years under existing terms. We also issued $1 billion in senior notes with a 10-year term at a 4.75% interest rate, which was well-timed. Over the first nine months of this year, we refinanced 14 property mortgages for about $1.3 billion at an average rate of 6.13%. We ended the quarter with approximately $11.1 billion in liquidity, and subsequent to the quarter's end on October 1st, we repaid our last remaining unsecured maturity for 2024, amounting to $900 million. We continually innovate in both our physical and digital spaces to provide world-class convenience for our shoppers and drive incremental sales for our brand partners. Continuing from our success with Shop Premium Outlets, we have rebranded our digital marketplace, ShopSimon, to leverage all our assets, including shopper email lists totaling over 25 million customers. The expanded and rebranded digital marketplace offers on-sale and discounted merchandise along with outlet products from leading brands, marking the next phase in our journey towards creating an ultimate omnichannel experience. We also launched a new nationwide marketing campaign, "Meet Me @themall," celebrating the mall's enduring legacy as a preferred destination for all generations. As for our dividend, we announced a dividend of $2.10 per share for the fourth quarter, a year-over-year increase of 10.5%. This dividend is set to be paid on December 30th, marking the fourth consecutive quarter of dividend increases, returning us to a pre-pandemic record high. Finally, regarding our guidance, we are reaffirming our guidance range of $12.80 to $12.90 per share, excluding the $0.14 per share year-to-date impact from the non-cash loss and fair value adjustments related to the Klépierre exchangeable bonds, which increased from a $0.01 net non-cash loss before the third quarter to $0.14 and is important to highlight. Thank you for your time today. David and I are now here to answer your questions.

Yeah. Thanks. Good morning, David and Brian. It sounds like you’ve got great momentum on the leasing front and with the portfolio north of 96%. I’m just curious how you guys are attacking the lease expiration schedule over the next couple of years and whether you feel like pricing power is moving materially in your favor, just given the interplay with sales being a little bit flat, but obviously there being strong demand for high-quality retail space?

I’ll respond to that simply. Our task is to enhance the mix of merchandise in our properties, which goes beyond just the rent we can charge. It’s crucial to determine the right tenants and the best mix for each location. We take a holistic approach to re-merchandising our centers and are currently engaged in significant changes across our portfolio due to increasing interest from better retailers, including restaurants. We need to capitalize on this interest, and that's our main objective. Construction costs have risen by 60% compared to pre-pandemic levels, presenting a considerable challenge, but we are among the few capable of managing this. The limited new supply puts us in a favorable position, but our focus remains on improving our properties rather than solely chasing the highest rents per square foot. We believe there’s still growth potential as leases end and new tenants are onboarded. I’m not fond of the term pricing power; instead, the emphasis should be on enhancing our portfolio. Recently, we held an intensive three-day session reviewing each property with our leasing team. We covered the malls this week and will discuss the outlets and mills next week. If you sat in on the session, you’d see that our primary focus is on property improvement, which is essential. Ultimately, when we prioritize this, we'll achieve the property growth we seek. Fortunately, the current supply and demand dynamics work in our favor, and we have the necessary capital to invest in our portfolio to enhance it and address the significant rise in construction costs.

All right. Well, I’m free next week if you want me to sit in on the meeting. Thanks.

You’re more than welcome. You get to choose Outlets or Mills, right? Let Tom know, okay?

All right. Thank you.

Thank you.

Thank you.

Hi. Good morning, everyone. David, you mentioned a growing development and redevelopment pipeline. I was wondering if you can go through how deep this opportunity is for Simon’s portfolio now, considering all that you’ve already done. To what extent is there still potential for anchor replacement or other retail redevelopments and then also the larger mixed-use projects?

I think that continues to be a huge focus for us. Our pipeline is probably around $4 billion right now. That doesn’t mean we’re going to do all of it, but we have significant mixed-use opportunities ahead and we still don’t have all the anchors redeveloped as we want. We have opportunities at locations like Barton Creek and down the line, for instance, some of the Sears. Fashion Valley is another great opportunity where we’re going to reclaim the J.C. Penney space and likely undertake about a $500 million redevelopment that combines retail and mixed-use. Our residential pipeline, as an example, exceeds $1 billion today, not even factoring in areas like Fashion Valley or Barton Creek that we believe could support residential development. We observe an interesting relationship between residential development adjacent to or part of existing retail formats; they actually complement each other well, which is very encouraging. If you listen to Don Wood, he’ll share the same sentiment. So we’re moving forward vigorously. Although supply has been oversaturated in certain markets, the reality is that nobody is currently building. Considering our perspective, it will take two to four years to bring these projects online, during which time there will be no new supply, placing us in a favorable position. In summary, our pipeline is around $4 billion, with roughly a third of that likely being residential.

Let’s throw one off.

We recently approved a deal at Clearfork in Fort Worth, which is a newer center, to construct an office and retail space on the ground floor. The office will be approximately 50,000 square feet, with Wells taking the majority of the space. We will continue to engage in similar projects moving forward, but we are not planning to build any large speculative office spaces from our pipeline.

Got it. And just to confirm, I know in there, you were talking about retail office, well, not so much office and the multifamily, you mentioned at one point in there overbuilding that was on the residential side, correct?

Correct.

Correct. Yeah. Correct.

Got it. Thank you.

Thank you.

Thank you. I would like to follow up on the first question regarding merchandising mix. David, you mentioned the omnichannel experience and the Meet Me @themall initiative. Could you elaborate on some of the key initiatives the company is implementing to engage customers and attract them to the centers? Also, how do you see this evolving over the next few years? I know you have some exciting programs planned for the upcoming holiday season. Thank you.

I believe the Mall remains a one-of-a-kind gathering spot. It's easy to get caught up in whether it's enclosed or has a roof, but that’s not what matters the most. What really counts is identifying the best retail projects in each area. We are confident in this approach, and new and innovative brands like Ascian and SKIMS share this belief in our offerings. We're witnessing a resurgence in interest from younger consumers who want to spend time at the Mall, which is something we feel responsible for positively showcasing, along with our investors and retailers. While we don't have the limitless budgets that tech companies do, we make every effort to emphasize that the Mall is a desirable destination. At the same time, digital commerce is significant for us, comprising about 14% to 15% of our total sales, and we see opportunities to expand in this arena through ShopSimon. We ensured there was proof-of-concept before branding it, as it originated from Shop Premium Outlets. After some initial challenges, we partnered with Michael Rubin and RGG, bringing in top talent to develop our marketplace. Once we confirmed its viability, we rebranded it to ShopSimon. We plan to enhance this with a loyalty program that will be crucial, and we're incorporating Simon Search to support it, along with options like shipping from stores and in-Mall pickups. The strategy is coming together, but we also want to emphasize the positive impact our offerings have on the community and our retailers as we progress. While digital isn't growing as quickly as before, we must be prepared for potential growth. I believe ShopSimon is the right platform for us, and our strong relationships with retailers foster confidence in our approach. We have a capable team and a solid partnership with RGG, which reassures me that we can generate real value from this platform. However, we recognize that achieving our goals will take time and require creative investments, and that’s the direction we are pursuing.

Great. Thank you.

Thank you.

Hi, Craig.

Hey. Good morning. Maybe just to follow up on the ShopSimon concept, David. As you guys are looking to re-merchandise Malls and there could be some more anchor fallout over time. I mean, is the idea here to hopefully get this up and running to where you guys can convert part of the Mall to last mile distribution and be able to bring that logistics angle to your business to help your retailers and also be able to monetize it or am I reading a little bit too much into it?

I believe we can definitely play a role in local store searches that are part of our center. Moreover, there's also a distribution aspect, and we can certainly assist with in-store pickup for our retailers. We're exploring the option of establishing a mini distribution center, evaluating possibilities with certain retailers or centers for a micro or mini distribution facility. Additionally, we're examining last mile logistics since that area is rapidly growing, and our real estate is strategically located. We're not situated in remote areas, and last mile logistics are crucial for us. Typically, our locations are top-tier. There are opportunities, though they won't be predominant; they will be selective, but viable options do exist.

Thank you.

Hey. Good morning. Hey. Congrats on the strong leasing quarter crossing 96% in occupancy ahead of…

Yeah. You’ve broken up there.

…go for your functionally full.

I believe we can still enhance our occupancy levels, but beyond that, our main focus is on merchandising. While we do have opportunities to grow occupancy, a bigger priority for us is attracting the right tenants to the right centers in ideal locations. We feel confident that there is still ample opportunity for occupancy growth.

Okay. Thanks. And just one quick one on FFO per share guidance. We’re trying to better understand the successful year contribution from real estate as opposed to some of the noise that’s generated by other platform investments. Are you still anticipating around zero cents from OPI or is that lower now and maybe offset by better real estate performance?

Greg, it’s Brian. I think we now think the OPI contribution is going to be a minus 5 to minus 10 for the year, but it’s being offset by significant improvement in the real estate FFO extension.

Okay. So overall…

We expect it to improve in the fourth quarter, for sure.

Right. But I guess, overall, I think my takeaway is that the real estate business guidance would be increased this quarter if it were standalone.

Yes. OPI has been a drag this year in terms of FFO. We essentially have four assets in OPI: our investments in RGG, Jamestown, SPARC, and J.C. Penney. Overall, these businesses generate a meaningful amount of positive EBITDA, but owning interest in a retailer comes with significant depreciation and expenses that negatively impact FFO but not EBITDA. It's important to keep that in perspective. Additionally, our investments in J.C. Penney and SPARC are minimal at this point. We have a bit more invested in RGG and Jamestown, but the scale of our company justifies it. As Brian mentioned, we're not static on the retail side with Penney and SPARC, and I believe we’ll have some positive updates regarding those businesses by the end of the year or early 2025. We're actively working on that. However, it has indeed been a challenging year, partly due to the sale of ABG, which resulted in lost income that we hadn’t anticipated when we budgeted. We're very pleased with that sale, as it was the right decision at the right time. Having tackled one opportunity, we are now focused on the next. We see RGG and Jamestown as long-term investments for now, though that perspective may change. Historically, entering the retail business was the right move, but considering the current landscape, we recognize it’s not the right time for retail investments, which is why we haven't made any in the last four years. We are aware and focused, and we have investments with value and no capital tied up in them, so our goal is to enhance that.

Yeah. thank you.

A little, yeah, a diversion from what you wanted, but I give you the full story, okay.

All the colors appreciated. Thank you.

No worries. Thanks, Greg.

Ron? Looks like we lost Ron.

Hey. Good morning out there, David, and yeah, I’ll be happy to coordinate with Tom and Steve on sitting in on one of those leasing sessions with you.

Well, we’ll do it. You might either be fully impressed or the detail might overwhelm you, so we’ll see.

I look forward to being overwhelmed. So, question, David, just getting back to the commentary on the 96% plus leased performance of the portfolio and the comments that you’ve made about the opportunity in the Malls. As you look at the bottom tier, for a long time you talked about the bottom 20% driving cash flow to reinvest in the top Malls, but given how competitive the retail environment has become, lack of new supply, are you seeing new opportunities in your bottom 20% of Malls that previously you would have just harvested for cash flow, but because of the changing landscape you now see opportunities that didn’t exist a few years ago?

That’s a really interesting question and a good point. If you asked everyone about the last three days of the Mall portfolio, I would say not every asset falls into the bottom tier, even though I don’t like that term. If you spoke with our team leaders, Jon Murphy and Eric Sadi, along with Rick and John Rulli, they would agree that one of the real opportunities for this company is to improve the bottom 20%. There’s truly no new supply in those markets. Just like human nature, we often prefer to focus on the second half. I believe there’s significant potential for improvement in that area because, in many instances, we are the only option available. Given the lack of supply and our capacity to reinvest, I am confident that we can make meaningful strides in the bottom tier, though not every asset in it. Most of them present opportunities. This will be a major focus as we head into 2025, without a doubt.

Thank you.

Sure.

Good morning, guys. Thanks. Question on the leasing. By the way, I thought the response to Alex’s question was fascinating, by the way, because we believe that, the B malls or the lower-quality malls, financing might finally be coming back to that market now, too. But maybe if you can talk about your S&O pipeline. Last quarter, you mentioned it was 250 basis points. How has that moved? I saw that HERMÈS just opened up its store in Phipps, and what percentage of that S&O pipeline is luxury in your view? Is it meaningful and are there other Phipps-type luxury projects planned in the portfolio going forward?

Yeah. Let me, yeah, interesting question again, and I would say, I have it right in front of me. I used to. But here, okay, so we have executed 75 new luxury deals covering 208,000 square feet and we have another 47 out for signature. So that’s kind of a total out there at this point, but again, we’re increasing that every day as we speak. So, yeah, we, even though, the sales for certain brands has slowed in that area. They are continuing to commit and for us, as you know, I mean, the build out and the time for those retailers to open is probably compared to kind of a traditional retailer is longer, but we’ve got a very impressive pipe on that with a lot of square footage that will open over the next few years and growing to this day.

And Floris, the sign but not open number is about 300 basis points. And importantly here though, as you’ve heard David talk about multiple times, this is about merchandising mix. So this isn’t all incremental. We’re swapping out underperforming retailers with better retailers. And we do have retailers making commitments well into the future in that number as well.

Thanks guys.

Okay. Thanks.

Hi. Good morning. Could you provide some color on the cadence of stabilization for the development and redevelopment pipeline? Specifically, if you could share, how much incremental NOI are expecting in 2025 from the pipeline on a net basis, all the openings this year and next offset by any, just rubber downtime with new projects, that would be super helpful for forecasting?

We believe we will end up delivering around 30% of the portfolio investment in 2025, which is in contrast to the 8% on leveraged deals. From that information, you can assess the expected income contribution.

And is that like an average then or I think that it’s like 30% on average will stabilize because like stuff that, delivered the third quarter, for example, this year is obviously going to be creative to 2025. Just wanted to clarify that point?

Yeah. I think that’s a decent run rate for expectation relative to our development business, but a third probably stabilizes.

Great, that’s helpful. And if I can squeeze in one more follow-up, can you just provide a quick description of any Mall redevelopment started in the quarter? I saw the spend increased some, but no description in the release of the project.

So we started a resi project at Briarwood, and we started a redevelopment at Tacoma. Those were the two big ones in the quarter that really, that we added to the pipeline.

Great. Thank you.

Thank you.

Good morning. Just given where we are with the election next week, just curious on your thoughts on potential positives or negatives that could come out, depending on which side wins. And I guess specifically also, what would be your view on tariffs? Is that positive or negative for Simon’s business as a whole? Thank you.

I believe that CEOs, whether they are founders or have risen through the ranks, should avoid political involvement. However, that doesn't mean they shouldn't engage in lobbying, as many issues in Washington can impact the company, and that's part of their responsibilities. I'm not here to align with the Washington Post's perspective or predict outcomes. The current atmosphere is quite charged, which is why we are cautious about our guidance for the fourth quarter; it is an uncertain period both domestically and globally. Ultimately, decisions should be left to individuals. People are what matter, and we will have to see how things unfold. We need to be prepared for various scenarios, potentially as many as six outcomes. This could range from a Democratic sweep to a Republican sweep, or a mix of both. While I'm not going to express a preference for any particular outcome, I believe it is my role to advocate on issues that could impact us, like regulations affecting our retailers or consumers. Ultimately, I think the focus should be on allowing the public to make their own decisions without undue influence from external figures. We just need to be ready for any of the six potential outcomes.

Fair enough. Understood. Thanks, David.

Thank you.

Good morning. Thanks a lot for taking my question. Maybe just tying some of the themes that we’ve heard from the call together. Your occupancy crossed 96%, you feel like there’s more room to grow, you’re focused on merchandising and being selective and it also looks like you’re expiring rates for 2026 maturities are below 2025 by 67%. So you’ve been throwing it together, does that give you confidence or visibility to sustainable mid-single-digit NOI growth over the next couple of years?

Hey, Michael. It’s Brian. Yes. We do believe that we will have the momentum in our NOI will continue. All of the things you highlighted are certainly part of it, plus the investment of capital back into the business. As you’ve heard David say, we will be opening up projects in 2025, 2026 and 2027, but there’s going to be no new supplies. So that is certainly going to support our growth as well.

Thank you very much.

Thank you.

Thanks for taking my question. Can you provide some color on the quarter-over-quarter improvement in Domestic and Portfolio NOI? And then how do you think about NOI growth in 2025 as an initial guidepost?

Well, Linda, I think, the quarter we continue to see rent growth, occupancy growth, conversion of temp to perm. I think you see the quarter reflecting us executing on our business plan to a high degree. And as I just said, I think we carry that momentum into next year as we continue to execute.

Any color on 2025, though, in terms of the same level continuing?

Well, Linda, we give our guidance in February, so we’ll update you at that point in time, but I do believe that we have momentum.

Thank you.

Thank you.

Thank you.

Yeah. Hi. Two questions. First, do you think you’ll see more acquisition opportunities over the next few years compared to what you’ve seen over the past five years or 10 years? And then the second question on development, redevelopment, what do you see as the average spend level for the next three years?

I’ll respond to the first question and then let Brian take the second. To start, our company has always been structured and financed to acquire high-quality retail real estate, which has been our main focus. It’s challenging to predict whether our acquisition strategy will mirror the past five to ten years. However, we do foresee growth opportunities ahead. Since the TRG deal, which occurred just before COVID hit, we haven’t made many acquisitions. It was a memorable time, but there was some confusion regarding COVID that could have been avoided. Regardless, it turned out well for all parties involved. It’s been quite a while since our last acquisition, but that doesn’t mean we aren’t looking or staying alert. We approach potential purchases thoughtfully, carefully considering what we want to acquire and at what cost. This approach will remain consistent, and I believe there will be future opportunities. While it’s difficult to make direct comparisons to previous years, I’m confident that we will grow through acquisitions over time. Now, let's move on to the next topic.

And Michael, I think, you think about the development and redevelopment pipeline. You heard David talk today about there’s about a $4 billion shadow pipeline. We’ve got a $1.2 billion committed. I think you’re going to continue to see us committed for a $1.5 billion a year. That could ebb and flow by a couple hundred million on either side, just given the size of the projects and the delivery of the projects. So we do see that level of investment available to us over in the future.

Great. Appreciate it. Thank you.

Thank you.

Thank you, Michael.

Thank you. Good morning.

Good morning.

Can you provide some high-level parameters on the progress you're making with ShopSimon.com, the traction you're gaining, and insights into the backend logistics? Given the multiple brands we have, are the shipments being consolidated, or is each individual retailer still sending shipments?

I’ll answer that first. We’re still in the early stages of using ShopSimon for delivery. It's primarily a marketplace, but we believe that in the future, we’ll be able to offer this service through the ShopSimon app or website. We've experienced significant growth in our GMV, and although I hesitate to share details due to our partnership, we’ve seen meaningful growth there. Now that we’re leveraging our brand and, as Brian mentioned, our 25 million email list along with added loyalty features, we anticipate more retailers joining, which will increase GMV and overall site volume. I’ll be cautious about sharing specific GMV figures now since we have a partner involved, but we are making significant progress and gaining real traction with several retailers. While I don’t have the exact numbers right now, Brian or Tom can provide that information after the call, but for now, I’ll refrain from disclosing the GMV.

Okay. Thank you.

Thank you.

Hey. Just a quick one for me. Just looking at the sort of the Domestic NOI growth, almost 5%, which is pretty strong. In the past you’d sort of made some comments about next year sort of hitting that 3% number. Just curious to get some update and comments on what you’re seeing on the ground and any sort of differentiation between the traditional Mall and Outlet business, as well would be helpful? Thanks.

I think overall, everything is moving in that direction. I appreciate your interest in us disclosing our 2025 comparable NOI growth, and we will provide that information in February. We are currently in the process of finalizing those figures; we reviewed the Malls this week, and we will assess the Outlets and The Mills next week. We will definitely share this with you during our year-end earnings report in early February. Importantly, the momentum we've witnessed over the past couple of years is continuing. That's the key takeaway.

Thanks so much.

Thank you.

Thanks, Ron.

Okay. Thank you. I appreciate all the questions and interest, and we’ll talk soon if we don’t talk of a good holiday season. Thank you.