Simon Property Group, Inc. (SPG) Earnings Call Transcript & Summary

Good morning. I'm Collin Mings, one of the real estate analyst here at Raymond James. I'm very excited this year to be joined by Simon Property Group here in Orlando for our Institutional Investors Conference. From our standpoint, it's a very interesting time to take a look at Simon, particularly SPG shares here right now, where we think the combination of a low multiple cash flow mixed in with a very attractive dividend yield, sets the stage for a very attractive total return profile. So to tell more about the Simon story, we're very excited to have Brian McDade, Chief Financial Officer; as well as Tom Ward, SVP of Investor Relations here with us. With that, Brian will take us through some slides. After that, we'll open up for Q&A. Brian?

Thank you, Collin, and good morning, everyone. Thank you for attending today's session. Just maybe for my edification, maybe by show of hands, who's familiar with Simon Property Group in the audience? [Voting]

So a good portion of you, so I don't need to get into the story -- the historical story. So look, Simon is at the forefront of transforming retail through innovation. As we are at the epicenter, the world's largest retail real estate company, we are driving forward our portfolio through investment, both in our physical real estate but also in other investments that are synergistic to our core portfolio. As we think about Simon, the company has evolved. It's been an enterprise for over 60 years. It's been a public company for over 26 years. We have been at the forefront of evolution of retail real estate from the beginning. As we think about the new paradigm of real estate going forward, we're really excited about the investments that we now have the ability to make in our business. In the past 8 years, we've invested over $8 billion into our portfolio and have an expectation over the next 5 to invest in an incremental $5 billion. We are resetting and driving forward the future of real estate within our business in a meaningful way. Simon is at the forefront. We are curating creative retail around the globe. We have a global presence. We have assets, over 380 assets, around the globe, 200 plus in the United States alone. As we think about the scale of that business, certainly, we are the market leader from a retail perspective. With brands, we have over 3,000 brands alone across the portfolio. As you think about the business, certainly relative to the narrative over the last several years, I think what's incredibly interesting is, over the last 8 years, the business or the properties have been over 95% occupied. So relative to what the narrative would tell you, that is certainly incongruent with the outcome there. As we've thought about the business, it's not just about owning physical real estate, but it's also what you can do with that real estate. And as we think about just simply walking through an asset, you get a tremendous amount of appreciation for the breadth of the touch points of our real estate. We have over 4.6 billion advertising impressions across the portfolio and over 180 million visits to our websites in the -- from a year. As important, we are also stewards in our communities. Across the United States of America, we contribute in excess of $5 billion between real estate taxes and sales taxes generated in our assets for the communities that we operate in. Very proud of that statistic. Maybe just in -- from a high-level perspective, we operate a business that is very capital-intensive. The most important aspect or asset of our company, in my humble opinion, is our balance sheet. We are Aa2 rated. It is a competitive advantage especially in the environment that we're operating in today, where we have the ability to reinvest in our business and really drive it forward. Others aren't as fortunate, if you would. And so that is -- our credit rating is an apparent advantage that we have. Associated with that is, as a public company, and this is a very -- a statistic we're very proud of, since we've gone public in 1993, we have paid out over $32 billion worth of dividends alone. As you think about the globalness of our portfolio, as I said, we have an interest in over 300 assets globally. And those assets produce over $80 billion a year in global retail sales for our retailers that are conducting commerce within our assets. As we scan to the U.S., our U.S. footprint or our North American footprint is approximately 200 assets. Of those 200 assets, approximately 100 of them, on average, do over $900 a square foot, and they represent north of 80% of our NOI in the United States. From a business perspective and also a fact that we are incredibly proud of, we've been named Fortune's Most Admired Real Estate Company 8 times. Digging into the portfolio a little bit further, we have a presence in top 10 markets around the United States. As I said, over $900 a square foot and over -- north of 70% of our NOI is produced by just 91 of our assets in the U.S. versus our 200 assets in the portfolio. Brands are incredibly important to our DNA as a company and to our growth story. We are the market leader. We are the most important landlords for the vast majority of retailers around the globe. We have a great partnership, and we continue to drive the business forward with those retailers. Just in the United States alone, last year, we brought 1,200 new retailers to market that we operate in. And so we are continuing to expand the offerings that we have within our respective assets. We operate in today's society in a live-work-play-shop environment, and this is our flywheel. We are at the cross-section of -- or crossroads of all of this commerce. We continue to diversify our business and take advantage of these incredible opportunities to bring in unique experiences into our assets, just touching upon kind of the outside of this. Nobu hotels, Hyatt hotels, live-work-play is an important mantra that we have, and we live it here in the Orlando market. It's kind of interesting. Florida Mall is an asset that we own. It's the first Crayola Experience there and the first M&M experience, the only one in the United States today. So we continue to bring new and unique experiences to what used to be the regional mall experience. Going forward, we will continue to invest in the business. As I've said, over the past 8 years, we've invested $8 billion within the business. That consisted of a -- capturing the live-work-play theory. We've built 10 mixed-use projects and represent over 3,000 units in addition to our retail offering at our assets. And we've redeveloped, just in 2019 alone, 25 of our assets. Going forward, we expect to invest an additional $5 billion within the business. We will build about 4,500 residential units. We will add about 1 million square feet and add about 1,500 plus hotel rooms to the operating business over the next several years. I think importantly here, and this goes back to the balance sheet point, the vast majority of this investment has been done with free cash flow from the business. So we are not adding incremental leverage to the business. We are using free cash flow after payment of our dividend to reinvest and grow the business. Just a few examples of what we're doing at some of our assets along the live-work-play-stay-shop spectrum. Phipps Plaza in Buckhead is going through a major transformation. We were able to recapture a department store. And on that 13 acres that the department store was located on, we are going to build a Nobu hotel and a -- and their first Atlanta restaurant. We're going to build a 90,000 square foot LIFE TIME FITNESS, and we're going to add a Class A office building onto a site that was producing roughly $1 million of income. When we complete the projects that we've listed here, that project will produce about $35 million worth of income. So we are seeing great opportunity to invest in our assets and drive significant incremental returns above and beyond what is existing today. We -- as I mentioned, we are a global business, and so we're just giving you a sense of what we're doing real time. In the past 24 months, we've opened up 4 outlet products: one in Canada, one in Denver, one in Mexico and one in Spain. And in the next 24 months, we will open up an additional 5, 2 of them will be in the United States, one will be in Thailand, one will be in England and one will be in France. And so we are a global business as seen here, spanning from Oklahoma all the way over to Bangkok, Thailand. So it's a very diverse company. We have the opportunity to take advantage of incredible scale across the globe. I mentioned some of the live-work-play elements to our properties. We are also investing directly within certain companies that are high-quality companies that we believe we'll be able to roll out across our portfolio. I mentioned LIFE TIME FITNESS. We also have invested in Soho House Farm, which is an upscale Italian restaurant. Allied Esports, which is the first e-gaming company that will bring and already has brought national gaming to Simon properties. There was a competition for Fortnite that we conducted across the United States of America with the winner crowned a few months ago. And last on this list is Pinstripes, which is an experiential dining and bowling concept. And so we are investing in these companies where we believe we can further drive their future opportunities within our portfolio for the consumers. In addition, obviously, the world has continued to become more mobile. We are investing heavily in that aspect of our business as well. In the fall of 2019, we contributed to our interest into an online market into the Rue and Gilt Groupe, and we will drive forward that business from an e-commerce perspective and bringing forth the power of the Rue Gilt Groupe with our shop premium outlets business to have an e-commerce marketplace in addition to the Rue and Gilt existing sites. There's also an opportunity to further bring the Rue and Gilt businesses into physical retail as we move forward with that business. And so you could see stores coming to local municipalities near you from an e-commerce perspective. We're not immune to it. We are investing in it, we believe it's a synergistic opportunity to bring forth the e-commerce platform, the omnichannel platform between our physical properties and the investments that we've made here. As I mentioned, the balance sheet is the most important asset of the business. We are a very conservative company by nature. We want to be able to have the capacity to transact or to run our business through all cycles. And so just a couple of highlights, as I mentioned, Aa2 investment-grade rating. After we've paid our dividend, we will generate between $1.3 billion and $1.4 billion of cash that we reinvest for the opportunities that we've highlighted. We're covering interest north of 5.3x, and our debt -- net debt to NOI, as you can see here, 10 years ago, was 6.5x, and we've worked that down to 5.2. The majority of that is simply from a natural deleveraging that occurs by reinvesting our $1.3 billion of free cash flow into our business without having to take on additional leverage. So those -- that $1.3 billion is earning anywhere between 7% and 8% on an unlevered basis every year. So that is naturally bringing down our leverage profile. Net debt to market cap is approximately 36%. Obviously, that's a function of where the world is pricing our stock. Reality is we believe that the stock is undervalued, as Collin mentioned. So that 36% on a reality basis is much lower. And we typically run the company with excess of $7 billion of liquidity between our undrawn credit facilities and our cash on hand, which allows us to take advantage of market opportunities as they present themselves. From a valuation perspective, Simon currently trades, and these are sale numbers, unfortunately. As we've all witnessed the last week, this changed pretty dramatically. But on an earnings multiple basis, we are currently trading approximately 6 turns inside the S&P 500. However, on a yield basis, we are trading approximately where -- today's yield is approximately 7%, so we're about 600 basis points north of the 10-year treasury yield. So as you look in -- I think the S&P today is probably about a 2% yield. So you got 500 basis points of positive spread to the S&P 500, while trading at a 6 multiple discount. Just looking at what we've done for shareholders starting in 2010, our dividend started out at $2.60 a share and has grown to $8.30. In 2019, we'll have returned $3.3 billion to shareholders and still are generating $1.3 billion of excess cash that can be reinvested in the business. Obviously, our ability to return capital to shareholders is driving our return on equity. You've seen a similar rate of increase in the return on equity in 2019, it was 83%. So we are returning capital to our shareholders and have the ability to reinvest in our business and grow. Life Time, I mentioned a couple of these things. I won't really dig in. What I think is interesting is we hear in the narrative that no one is shopping in malls anymore. But yet, we still have in excess of 2 billion visits a year at our assets. I will tell you that, and maybe some of you did this as well, but towards the assets in the market yesterday, which we have 2 outlets in Orlando into full price malls, and the biggest problem we had all day was trying to find a parking spot. So although no one's shopping, I don't know why everybody is parking at the mall. It's interesting. Maybe just quickly in summary before we get into the Q&A with Collin. We are the premier real estate company globally from a retail perspective. We have a long history of industry-leading balance sheet management, dividend growth and shareholder returns. We are reinventing the shopping experience and evolving our retail assets to meet the needs of consumers today. We have opportunities to invest in the business for accretive returns, and we have a growing and well-covered dividend. Collin?

Perfect. Great overview. A lot of things that I want to touch on here real quick. But one thing from my vantage point, I think, continues to be underappreciated about the Simon story is, again, that balance sheet quality and the flexibility provided not only by the balance sheet, but the free cash flow. So along those lines, one thing that comes to mind is obviously capital allocation and capital allocation priorities. So maybe against that backdrop, a couple of things I want to touch on, on this front. But maybe first, just obviously announced a high-profile transaction pending as it relates to Taubman Center. Maybe just talk a little bit about that. A few years ago, Simon talked about maybe being out of the big deal business. But now as conditions evolve, you're back in that. So if you can just expand upon that opportunity and how that complements your existing portfolio?

Sure, absolutely. Thank you. We did announce a merger with Taubman earlier in the month. We're very excited about it. We believe the 2 businesses are very complementary to each other. They own a portfolio of 22 assets in the United States and 3 in -- an interest of 3 assets in Asia and a fourth being built. They are incredibly high quality, high productivity assets. I think they're about $1,000 a square foot on average. That really fits well within our operating business on the earnings call or on the announcement call. Bobby Taubman, I think, sums it up well where he said 1 plus 1 in this instance is really going to equal 3. There is certainly best practices that we can share amongst the organizations. They do some things incredibly well, and we do some things incredibly well. So bringing these assets under our -- or investing in these assets, we believe that we will continue to drive forward the opportunities that we've already identified and have been capitalizing on. They are great located assets in great geographies, and we believe that our investment will further the ability for these assets to grow. And it's -- quite honestly, it's consistent with our philosophy. We have been out of the big deal business because there wasn't an opportunity to transact on a portfolio or a series of assets that made as much sense as it did here. We were able to come together with the Taubman team over the past 6 or 7 months and structure of transaction, I think, worked well for everybody.

One thing along these lines in terms of, again, the flexibility you have to invest on multiple fronts, recently announced being one of the investors in Forever 21, as that's kind of gone through bankruptcy proceedings. So maybe just talk a little bit more about that investment, and this is not the first time you've done something like this. With Aeropostale, you've had some success on that front. So maybe just, again, for those maybe not as familiar, talk a little bit more about the investment and where you see the opportunity as you saw in Aeropostale?

Sure. We came together with a consortium of Brookfield, which is another property operator, and the Authentic Brands Group, which is a brand company or an IP company that manages brands across the globe to invest and to purchase Forever 21 out of bankruptcy. And there was -- and we had done the same investment. They're the same investment philosophy, if you would, on Aeropostale, as you mentioned. There is an opportunity to step into the situation and rightsize a retailer who maybe lost their way. And it is an iconic brand that was generating $3.5 billion of sales globally and maybe made some missteps along the way from a management perspective. We believe that we can step in and rightsize the ship, if you would, similar to what we did with Aeropostale. Aeropostale, just to give you some sense, was a bankrupt -- it was a public company that ultimately transitioned and went into bankruptcy. At the time of bankruptcy, when we bought it out of bankruptcy, it was producing negative $80 million worth of EBITDA. Through our investment in our management and rightsizing of the business, that business now produces almost $80 million of positive EBITDA. So we've seen a significant change in the prospects of that business through simple management techniques using economies of scale and real focus. And we believe that we're going to see similar or have the potential to see a similar result from the Forever 21 investment. It is a great brand. It has great brand loyalty. We will rightsize the cost structure of the business. We will give it some additional economies of scale, whether through back-office administration or technology or what have you, and we believe that there is a viable brand that will come out of this and continue to prosper going forward.

So as we think through balancing these different options you have from a capital allocation standpoint, I mean you have the slide on here that talked about the capital returned to shareholders, again, a combination of both dividends as well as some stock repurchases. Clearly, you have some opportunities on making investments or acquisitions. Just talk a little bit more about how you're trying to balance all those different options, particularly here now with the stock trading off a little bit more, how do stock buybacks look. And again, dividend, an attractive dividend yield, but there's still ample capacity to increase that, if you wish. So talk a little bit more about balancing those options.

Sure. The fortunate thing for the business is that we don't have to make an either/or decision. It can be an and decision. And I think we've represented that over time. I think if you look last year, as I mentioned, we've returned $3.3 billion to shareholders. In addition, we invested approximately $1 billion into our physical real estate, and we also invested in these opportunistic synergistic retailers like the Forever 21s and the LIFE TIME FITNESSES of the world. So the generation -- or the cash flow generation of the business allows us to be selective, certainly, but it also gives us the flexibility to react as conditions warrant. So we have the ability to do -- to kind of pull the levers that are appropriate at the appropriate time.

I do have some questions -- other questions I want to cover. But by all means, if there's any questions from the audience, I want to field those as well. So I don't know. Yes, ma'am?

Don't you have a presence in Asia? And can you give us any insight [ as to what has to happen ] in the last month or so with the virus?

And just to repeat it for the webcast, we got a question was just on, in particular, Asia, given Simon's presence over there, any sort of update related to the virus. And I would just piggyback on that, just anything even domestically. So just a broader update on coronavirus.

Sure. Look, it's obviously unfolding real time. We have not seen in our assets in Asia any material change. We do not -- until we close on the transaction for Taubman, we'll not have any direct exposure to China. Our assets are outside of China. And so we've actually seen a pretty steady state. Now obviously, the last 2 weeks have changed the dynamic a little bit, and the escalation of at least the narrative is changing. So that could ultimately evolve over the course of the next few weeks, and I'm sure it will, but we've not seen any material impact to the business.

Any other -- yes, sir?

Yes. You've spent some time explaining your aggressive financial metrics. How are they impacted by the Taubman transaction?

So obviously, it's an accretive transaction. So bottom line growth is going to be here. Leverage certainly is going to go up. The way that we are financing the transaction initially, we'll be using our existing liquidity or additional potential capital markets transaction. So you will see our leverage net debt to NOI on the screen was a 5.2. Our projections would tell us it's going to go north or probably 6.1. So there's going to be about a turn of leverage added to the business initially. But we do expect over time that that will come down through the ability to drive organic growth. The earnings profile on our earnings call, we did -- or on the announcement call, we did articulate that we believe that this is going to be an immediately accretive transaction at 3%, if not greater than that over time.

Just a follow-up. You had statistics that 91 properties generate 70% NOI, which suggests that there are a lot of properties not generating that much. Will you consider divesting those? [ Is there a ready market for them ]?

So it's interesting. Those are -- that's almost the crown jewel of the business to some degree because as you look at those assets, most of them have no debt on them and most of them are producing the free cash flow that allows us to reinvest in our very best assets. And so we are taking the cash flow that is generated at the lower part of our portfolio and reinvesting in the very best assets. So there is no plans for disposition. We don't believe that we need to dispose of those assets. They are actually a very important part of our capital structure.

Just for the benefit of the webcast, again, the question tied back to potential disposition opportunities, again, particularly following the pending Taubman transaction. Any other questions from the audience? Yes, sir?

What kind of synergies are you expecting from the Taubman transaction?

Well, look, there's natural leasing synergies that will be there. We've -- so the Taubman transaction is a joint venture that has been formed between ourselves and basically the Taubman family as through this transaction. So there will be synergies. There'll be cost savings. There'll be economies of scale from a purchasing perspective. There will likely be the ability to drive leasing outcomes, if you would. So there are a plethora of outcomes. We will immediately reduce the public company costs that Taubman has historically incurred. And look, there's a variety of things that are going to come out of this as we share best practices between the 2 organizations.

You're not going to give a certain dollar amount or no?

No.

And then again, for the benefit of webcast, that question ties back to synergies related to the Taubman opportunity. One other thing -- any other questions from the audience at this point? No? Another thing I want to touch on just a little bit more and you talked a little bit about the narrative and some of the, obviously, headline, store closures, overall retail environment. Coronavirus aside, maybe just talk a little bit more about what you're seeing from a tenant health standpoint and then some of the opportunities. And you touched on this a little bit as far as redevelopment opportunities, maybe taking what was a department store box and make it -- and converting it to some of this live-work-play as it relates to your portfolio. So maybe just talk a little bit about tenant health and what you're doing to kind of position your portfolio as some of these opportunities kind of manifest themselves as well.

Absolutely. Look, the -- there is an evolution that is going on in retail real estate, and it's been ongoing forever candidly. If you actually look back when Simon went public 25 years ago and you looked at the top 10 tenants at that point in time, there's only one of those tenants that is still in business today. Yet when Simon went public, it went public with a $3 billion valuation. And today, that valuation is probably closer to $75 billion. So the moral of the story is tenants come and go quite candidly, but well-located real estate is well-located real estate. And what you can do with it evolves over time and will match the consumers' needs. One of the biggest opportunities that we've seen in the last 25 years as a public company is the recapture of the department store. We have been prohibited with improving our real estate over the past 25 years, just given the structure -- the historical structure of the business. A bit of a history lesson, but the way that the business was formed as you basically gave your department store or anchor tenants free rein to do what they wanted, they didn't really pay you anything because the idea was they were going to drive the traffic 25 years ago. That's completely flipped today. Although the anchor stores are still continuing to hold on and basically pay no rent, the traffic is driven by the in-line tenants in the mall. And so what we've had the opportunity to do now is recapture these department stores and add incremental exciting uses that we didn't have the opportunity to do 5, 10 years ago when department stores were in a different position from a financial perspective. This is -- candidly, it's the single biggest opportunity that we've seen in our business in 25 years is to recapture the space and drive forward the use of our real estate to what consumers are looking for today.

One last one from me, and we're running tight on time, but I think it is worth highlighting, particularly given the growing focus from a lot of investors on ESG initiatives.

Absolutely.

Simon has been at the forefront. If there's just a few things that you could touch on, on that front just for investors with that mindset.

Absolutely, it is an incredibly important part of our business. We are all citizens of the planet. And the more we can do to drive and improve society, we will do. We've been very focused on reducing energy emissions and greenhouse gases and water consumption, and we've invested heavily within the business whether it be LED lights or more energy-efficient HVAC systems and what have you. We are very focused on the footprint that we are -- we have in the world, and we are continuing to reduce it. As you think about the narrative out there about e-commerce, and that's one side of e-commerce that I think is a bit underlooked, it's their impact on our society. I mean think about how much incremental cardboard you get at your house every day. Think about how much incremental gas -- greenhouse emissions are coming from that delivery truck that's now coming to your house instead of the one that's going to the mall. It is an area of focus for us, it continues to be. We are very focused on the communities that we operate in. I gave the statistic earlier that, across the United States, we are responsible for approximately $5 billion worth of contribution between real estate taxes and sales taxes to the communities that we operate. Obviously, a mall has jobs and economic benefits outside of that. So it is an area of focus that we continue to be driving forward, and it's an area that's going to continue to get a lot of investment dollars from the company.

Thank you again for joining us here in Orlando. Please join me, everybody, in thanking Simon Property Group for making it down from Indianapolis today. I really appreciate their time.

Thank you, everyone.