Simon Property Group, Inc. (NYSE:SPG) Q4 2023 Earnings Call Transcript

Simon Property Group, Inc. (NYSE:SPG) Q4 2023 Earnings Call Transcript February 5, 2024

Simon Property Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Simon Property Group Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] 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: 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 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 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: 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 in 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 then 50, and disposed of approximately 250 resulting in our current domestic portfolio of about 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, 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, our 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 a $100 million in NOI. These assets are in great locations, have a loyal and large customer base that is where the retailers want to be. No other asset type has 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 that. I want to thank the entire Simon team, who have contributed to 30 years of success as a public company. And now let me turn to our fourth quarter ’23 results. We generated approximately $4.7 billion in funds from operation 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 at $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 ’23 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%, and occupancy is above year-end 2019 levels for all of our platforms. Average base minimum rent for malls and outlets increased 3.1% year-over-year and The Mills rents increased 4.3%, we signed more than 960 leases for approximately 3.4 million square feet in the fourth quarter. For the year, we signed over 4,500 leases, representing more than 18 million square feet approximately 30% of our leasing activity for the year were new deals, we’re going-in rents of approximately $74 per square foot and renewals had going-in rents of approximately $65 per square foot.

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 through The Mills. During the quarter, we sold a portion of our interest in ABG for gross proceeds of $300 million in cash and reported pretax and after-tax gains of $157 million and $118 million respectively. We opened our 11 outlet in Europe last year, construction continues on two outlets, yes, one in Tulsa, Oklahoma, and yes, one in Jakarta, Indonesia. We completed 13 significant re-developments. And we’ll complete other major development projects this year. In addition, we expect to begin construction this year on five to six mixed-use projects representing around $800 million of spend from Orange County to Ann Arbor, to Boston, to Seattle, to Roosevelt Field, they are some of the ones that are planning to start this year.

And we expect to fund these redevelopments to 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 three 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 and year-over-year increase of 8.3%.

The dividend is payable on March 29 of 2024. Now moving onto 2024, our FFO guidance is $11.85 to $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 to $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 to $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: [Operator Instructions] Our first question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

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Q&A Session

Steve Sakwa: 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 what sort of conversations are you having with the tenants and maybe how the pricing dynamic changed there, given that you’re now kind of 95% leased and pretty full in the portfolio.

David Simon: Well, I mean, Steve, we’re always adjusting our mix. We’re always trying to – so even though we’re 96% leased, we’re always looking to improve our retailer mix and obviously, that’s been beneficial to our NOI growth. I would say, just generically, 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 people that populate our shopping centers to be part of what we’re doing it. So, I think as you probably saw our new deals are $74 a foot thereabouts, our renewals are $65 a foot, our expiring leases this year in the $56 – $57 range. So we’re seeing generally positive spreads supply-and-demand is in our favor.

Historically low supply in big properties across the country, I mean, there used to be 40 million square feet of retail real estate built every year, now there is essentially less than a few million here and there. So, 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 the bricks and mortar has never been higher. And the cost of all of the things that we said about, don’t get me wrong e-commerce is critically important, but all of this stuff about e-commerce, cost of customer acquisition, returns, stickiness, et cetera, all continues to be a challenge. If you looked at the marketplaces, that pure online, they run into problems.

So, you really – they really need to be connected to a bricks and mortar for survivability. So, all of those things are pointing to a positive picture, it’s a function of execution. A function of being first a function of continuing to improve our properties, which we’re very focused about, but now even though we’ve bounced back and had a couple of really good years in terms of lease-up from the depths of the pandemic, we’re not finished and retail demand continues and it is strong and it’s across the board. I mean, it’s not one, category one retailer, but pretty much across-the-board.

Steve Sakwa: Thanks, that’s it.

David Simon: Thank you, Steve.

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

Caitlin Burrows: 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 ’24 or maybe what could influence that decision?

David Simon: Sure, well let me just – we sold about 2% of our ABG stock. So, we essentially went from just under 12 to just under 10. And we’ll continue to look to monetize these investments, they’ve been by and large, very good investments across, not just the big ones, but the smaller ones as well. Obviously, there’s number of them that are synergistic to us. But, we have a strict adherence to creating value. And we think we can deploy that capital into kind of what I’d call the mothership and can get better growth from that and that’s where our number one priority will be. So, it wouldn’t surprise me, Caitlin, for us to continue to monetize, obviously, the – some of these are bigger value – bigger investment. So, it’s not that easy to do it in one big swoop, but We’re very focused on portfolio management of those assets and If we can monetize and are we going to get a better return plowing it back into our core business.

Caitlin Burrows: Got it, thanks.

David Simon: Yes, thank you.

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

Jeff Spector: Great. Thank you. And first, congratulations on the anniversary. David, there is a lot of initiatives. So as you think about the next five years, I know it’s probably 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: Well, look, 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 interesting and exciting things that we’re doing on the ground level. And 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 population and a growing – and I’m not, when I say Southeast Asia, I’m not like in Jakarta, places like that where it is not China, it is 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 – in terms of that. So we – 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 handle enhance and 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 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 this center can I buy it, what retail are 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 system about customer interaction, reinforcing their shopping behavior, rewarding loyalty, expediting their trip to make it more useful 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 retail mix. The exciting thing is, 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 our centers are a good place for them to do business. So, those are the ones that come to mind, and I’m certain, there’ll be ones that I haven’t even thought of.

Jeff Spector: Very helpful. Thank you.

David Simon: Thank you, Jeff.

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

Alexander Goldfarb: Hi, 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 and sort of – 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, 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, meaning that the surpassing pre-pandemic NOI versus the dividend is really just a function of the higher interest expense now.

David Simon: Well I mean, Alex, look, our yield is ridiculously hot, okay. So, that’s really where we could financially pay $2.10 tomorrow, right. So, we have $1.5 billion of free cash flow after dividends. So, it has nothing to do with financial wherewithal. I mean we like our – we would like – we don’t like trading at this high yield. So I think, I think that’s kind of how we look at it, we still think as we have these, additional capital events. We still are anxious to continue to buy our stock back. And again, when I look at either the S&P 500, I look at the REIT peer group, I look at, what the strip center REITs – our yield is plenty high for investors. So tell all my investors, I could pay $2.10 tomorrow evening, okay, per quarter without a blink and our yield is too high.

And, it will be there before you know it, but we would like to trade at a lower yield, because we think, certainly if you look at it on that basis, our yield is higher than it should be I mean, the S&P is under 102%, our REIT strip centers, Tom are in the 4s. We’re close to s7, right – 6.5 – 7. So. I mean Alex, you should be pounding the table.

Alexander Goldfarb: 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: No, I, I’m kidding. By the way, we’re not – just so you know, we like you’re welcome out there, we are west of the Hudson, but we’re not going to tell you exactly where we are, okay? Somewhere in Indiana tonight, – we may not be in Indiana tonight, but we are west of the Hudson.

Alexander Goldfarb: I assume you’ll be in Las Vegas this Sunday.

David Simon: Well, I can’t tell you in my schedule.

Alexander Goldfarb: Thank you.

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