Simon Property Group, Inc. (NYSE:SPG) Q3 2023 Earnings Call Transcript

Simon Property Group, Inc. (NYSE:SPG) Q3 2023 Earnings Call Transcript October 30, 2023

Simon Property Group, Inc. misses on earnings expectations. Reported EPS is $1.82 EPS, expectations were $2.98.

Operator: Greetings. Welcome to the Simon Property Group Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Tom Ward, Senior Vice President, Investor Relations. Thank you, you may begin.

Tom Ward: Thank you, Sheri. And thank you for joining us this evening. 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. 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 and actual results may differ materially due to 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 maybe 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 to please respect our request to limit yourself to one question. I’m pleased to introduce David Simon.

David Simon: Good evening. And I’m pleased to report our third-quarter results. Third quarter funds from operation were $1.2 billion or $3.20 per share. Let me walk you through some of the highlights for this quarter. Compared to the same quarter of 2022, domestic and international operations had a very good performance this quarter, and contributed $0.17 of growth, primarily driven by higher rental income. Non-cash after-tax gain — gains of $0.32 in the third quarter were related to the partial sale of our ownership interest in SPARC and ABG as a result of ABG selling primary shares in the quarter. Higher interest expense was a setback of $0.07 year-over-year. We had a $0.15 lower contribution from our other property investment platform compared to Q3 2022, and a $0.02 loss on mark-to-market of publicly traded securities.

FFO from our real estate business was $2.91 per share in the third quarter compared to $2.83 in the prior period last year. So far, our real estate has produced $8.55 per share for the first nine months compared to $8.40 from last year. We are pleased with the transaction SPARC completed with SHEIN during the third quarter that demonstrated the value that we have created in that business. The transaction was significantly above our basis. And as a result, we recognized a gain in the corner. And the transaction ultimately reduced our ownership interest in SPARC from 50% to 33% as we have managed SHEIN as a partner. Given our lower ownership interest in the back-end weighting profitability in the fourth quarter, we now expect $0.05 lower FFO contribution from SPARC in the fourth quarter of this year.

During the third quarter, the Taubman family exercised their put right on a portion of their interest in TRG. We exchange 1.725 million partnership interest units for an additional 4% ownership interest. We now own 84% of TRG. Domestic property NOI increased 4.2% year-over-year for the quarter and 3.8% for the first nine months. Portfolio NOI, which includes our international properties at constant currency, grew 4.3% for the quarter and 4% for the first nine months of the year. Mall and outlet occupancy at the end of the third quarter was 95.2%, an increase of 70 basis points compared to last year. Our third quarter occupancy is higher than fourth quarter of last year, which has not occurred historically. The mill’s occupancy was 97.4%, and occupancy is above all year-end 2019 levels for all of our platforms.

Average base minimum rent for malls and outlets increased 2.9% year-over-year and the mills was 3.6% year-over-year. Leasing momentum continues across our portfolio. We signed more than 970 leases for approximately $4.3 million square feet in the quarter. Through the first nine months of 2023, we signed more than 3,500 leases for 15 million square feet, which is expected to generate over $1 billion of revenue. We have an additional 1,100 deals in our pipeline, including renewals for another $400 million in revenue. We are seeing strong broad-based demand from retail community, including continued strength for many categories. Reported retail sales per square foot in the third quarter was $744 for the mills and outlets combined and $676 for mills.

We continue to be active in redevelopment and new development. During the quarter, we started construction on a significant redevelopment at Brea Mall, and a new upscale outlet center in Jakarta, our first Premium Outlet in Indonesia. We completed the refinancing of 11 property mortgages during the first nine months of the year for a total of $960 million at an average rate of 6%. We have — our balance sheet is strong with approximately $8.8 billion of liquidity. Today, we announced a dividend of $1.90 per share for the fourth quarter, which is a year-over-year increase of 5.6%. The dividend is payable on December 29th. And we also purchased approximately 1.27 million shares of our common stock for $140 million. We are increasing our full-year 2023 guidance from $11.85 to $11.95, to $12.15 to $12.25 per share.

This is an increase of $0.30 at the midpoint. So to conclude, I’m pleased with our third-quarter results. Our business is performing well and is ahead of our plan. Tenant demand is strong. Occupancy is increasing. Base minimum rent levels are at record levels. And we are very experienced at managing our business through volatile periods of time. And as you all know, this is when we do some of our best work. So, we’re now ready for your questions.

See also 30 Most Profitable Agricultural Business Ideas for Young Entrepreneurs and 20 Best Hindi Karaoke Songs for Male Singers.

Q&A Session

Operator: [Operator Instructions] Our first question is from Ron Kamdem with Morgan Stanley. Please proceed.

Ron Kamdem: Great. Thanks so much. Just one on some of the guideposts you’ve given in the past. As we’re flipping the calendar to 2024, you talked about sort of 3% organic growth as achievable. Just wondering how you’re thinking about that and how we should think about potential interest costs, headwinds as debt sort of rolls? Thanks.

David Simon: Sure. Look, I think we feel good about that kind of comparable NOI growth. Our debt is reasonably laddered. So yes, we’ll have some interest expense headwinds, but we still think we’ll end up growing our business next year with that said.

Ron Kamdem: Great. Thank you.

David Simon: Go ahead, Ron.

Ron Kamdem: I was just going to say if I could ask a follow up just on the $0.30 cent guidance raise. I think you talked about $0.32 cent gain and then $0.05 cents lower from the retailers. Just wondering is there any other sort of puts and takes that we should be mindful of? Thanks.

David Simon: Sure. No, we’re going to have $0.05 lower because of the SPARC-SHEIN deal. We lost a couple of cents from our mark to market on a couple of our public securities that we own last quarter. And essentially the real estate business has been very significant to our growth and we’ll kind of see where the fourth quarter ends up but I think it’s — 97% of our business is going to outperform what we thought from originally what we had budgeted.

Ron Kamdem: Thank you.

David Simon: Sure.

Operator: Our next question is from Caitlin Burrows with Goldman Sachs. Please proceed.

Caitlin Burrows: Hi, good evening everyone. David, I know you gave some numbers on recent leasing activity which sounds really strong. I was wondering if you could give some additional context maybe to how that leasing activity compares to recent and pre-pandemic years, maybe what that means for pricing and how that could impact permanent occupancy?

David Simon: Well, thank you, Caitlin. So I would say, let me try and address your questions in no particular word. I think we’ll be, year-end occupancy will be obviously higher than it is today. I don’t know that it will be our highest ever, but it it’ll be within distance pretty close. Even with all the volatility in the world and the market, we still expect — we still see demand very strong. I mean, we’re — frankly, we’re cautious, we’re waiting for shoes to drop, but we haven’t seen it on our new deals, whether it’s F&B, entertainment, high-end luxury tenants, athleisure, just to name some categories. We’re seeing — we’re still seeing a lot of demand on that front. And I would say from a pricing element, we feel — I would say we feel comparable to the way we felt in ‘15, ‘16, ‘17 era, in terms of era.

I guess that was almost seven, eight years ago, but lots happened over those seven or eight years. But we still feel like that’s kind of — we’re in that good shape where we’re driving rents up and it’s okay for the retailers. They’re making deals and supplying demands in our favor. Obviously we cycled through a lot of poor performing retailers due to COVID. And the ones that we are doing new deals with are excited to do business with us. So pricing is for sure going in the right direction. Occupancy is going up. And tenant demand is pretty strong across the whole spectrum. And even in certain categories, just to take luxury, yes, there are some that are being more cautious, but there’s plenty that are growing new stores. So it’s really retail specific.