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

Welcome to Citi's 2024 Global Property CEO Conference. I'm Nick Joseph joined by Craig Mailman with Citi Research, and we are pleased to have with us Simon Property Group and CEO, David Simon. The session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions. David, we'll turn it over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons that investors should buy your stock today, and then we'll get into Q&A.

Okay. I have Brian McDade, to my right, who is the CFO. What happened to Ward? Come on up here. You get the front row seat. So we're giving Citi one chance. Okay. Last time I was here was 2017, one chance. No, I'm kidding. All right. So you want me to give a little highlight on the company. Okay. So Tom wrote this. If you have any problems with it, talk to Tom. But last December, we celebrated our 30th year as a public company. In that period of time, we've paid out $42 billion of dividends. So I think we went public at $22.25. Marty Cicco screwed me for the last quarter, which didn't seem like a lot of money until you do the math and it was. So this year, at the end of this year, that will be $133 or thereabouts, $135 of dividends paid. So not quite technology returns, but a sense of the longevity of our company. We have $12 billion in liquidity. We are really good investors. We buy, we hold, we redevelop, we improve. We have the ability to build in all sorts of different parts of the world. So one of the underappreciated things is we're building an outlet center in Tulsa, that's Oklahoma for those of you who don't understand west of the Hudson. At the same time, we're building the center in Jakarta, and we built one outside of Paris last year. So we had a great property NOI growth of 4.8%. We had a record FFO of $12.51 and our occupancy sales, all those kind of statistics are up. We had fourth quarter, even though your commentary on our fourth quarter call was not as friendly as I would like to have seen, but that's okay. We're used to it. We have thick skin. We had comp NOI growth that's over 7%, right, which was highest in the -- you failed to mention that, but that's okay. It was the highest in the sector. So I told you about the liquidity and the portfolio is in good shape. Tenant demand is in good shape. Balance sheet that allows us to look at the long run, look at the long term. So we're going to be continuing to redevelop while others worry about the cost of their capital. We can do it out of our cash flow or our own liquidity that we've created. So not everything you wrote but close enough, right? Okay.

All right. Why don't we start with the comment you made on tenant demand being strong and kind of the leasing activity. If we can dive into that a bit, what you're seeing and maybe if we can talk about malls versus outlets and across the portfolio.

Again, I think the analytic community gets too focused on whether there's a roof on it or not. Just to give you a sense, we have 83 enclosed malls. Out of 215, 40% of our cash flow is in the -- we got a roof on it. By the way, we live in houses that have roofs, right? So would you want to live in an outdoor? Maybe in Cabo. Cabo, I would recommend you don't have a roof in a lot of your areas. But roofs are okay, right? But for some reason, roof is a problem in the analytic community. But 40% of our portfolio has a roof on it, 60% is basically outdoor centers. I don't see the demand difference. Good real estate is good real estate. The outlet sector sales have picked up. The full price really picked up right out of COVID. Outlet took a little longer as the consumer is looking for more value, they're starting to go to the outlet a little bit more. Outlets tend to be more tourism driven. So tourism is obviously, back, not international as much as it has been historically, but so on dollar fluctuations have something to do with it. But by and large, we don't really segmented tenant demand by whether it's a mall or an outlet. We don't really see a difference between the two at this point and tenant demand is pretty good across the board.

In the conversations with the tenants, do they see a difference if there's a roof or not?

Not really. I mean some kind of do, and we try to dissuade them from that. I think a lot of -- all I can say is, and we see it across the board, the high-quality malls with roofs' productivity, in many cases, far exceeds an outdoor center. And again, it's perception versus reality. All I can tell you is you look at our cash flow and look at our longevity as a company, look at the fact that we're capitalized the way we are, all of that's happened because we have these assets that have roofs on them. So don't get preoccupy it. We don't have $12 billion of liquidity, we didn't pay $42 billion in dividends because our real estate is not that good.

And David, Macy's is out with their news this quarter, 150 stores. They haven't made the list public, but I'm assuming some of their landlords know which spaces may be on that list. Could you just talk about the impacts, positive and negative, to you guys from either store closure or the ability to have better control of your real estate and kind of get some of these boxes back and unencumber some existing value at some of your malls?

Well, I know more about running department store than I ever really wanted to. But I would say it's very hard to shrink to grow, by and large. This is a generic comment and -- on one hand. On the other hand, to the extent that a change in strategy allows you to reinvest in your physical properties is probably a pretty good outcome. I think companies have been distracted by their ability to reinvest. I go back to, take Walmart as a great example. I don't know, this must be well over a decade ago, and obviously, the family owns 50% of the company. So they kind of do what they feel is right. And by the way, they're usually 100% accurate. When we had the huge dot-com focus, Walmart announced -- Tom, you can get the date, I'm thinking it's 10, 12 years ago. They announced they were going to invest in their store profile. They were going to reinvigorate their store. And by the way, that was the juggernaut that allowed them to do what they're doing today. And that allowed them to invest in all the technology aspects and their dot-com business and everything. But it started -- and the stock dropped like a rock that day whenever it was, I'd actually like to know when it was, I forgot about when it was. But the ability to invest in your product is really appropriate. So -- and we've done it historically for year after year. So I think if the company feels like this gives them the freedom to invest in their existing fleet, that's a good outcome. They need to do that. On the other hand, there'd be other things that I would do differently than what I've announced. And the fact of the matter is, I think at the end of the day, it's not going to determine our fate one way or another. We have -- if I go back in time to the Sears announcement, right? So Sears was going to do this, that and the other when they were bought and many thought we couldn't outrun Sears. That, that was the beginning of demise. The reality is it gave us more opportunities. And at the end of the day, it didn't matter. It doesn't matter. So I think there's a lot of opportunity there if they decide to have -- if they had the conviction that they can invest in their product. And it will be interesting to see how that evolves. But that takes courage, it takes willingness to do it, and we'll see what happens. But I encourage everybody to go back to the Walmart announcement. And when they said they were going to invest in stores. I heard Brian Cornell today talk about Target. They're investing in the stores. Target has 2,000 stores, Kohl's has 1,100, Walmart got a gazillion, JCPenney has 660. So Macy's going from 500 to 350. I'm not sure -- I like scale. And I like EBITDA, even if it's coming from a small market thing. How do you replicate a fully depreciated asset? That's what I like. I like cash flow, yes, it may not be the prettiest asset that we have, but if it's cash flow that you can invest in a prettier asset, you do it and just don't be swayed by the external, what people want you to do, okay? Because I think at the end of the day, you need a certain amount of conviction in what you're trying to accomplish. Those were generic comments, okay?

Yes. Would you guys have an appetite or strategically makes sense to buy some of these boxes and draw it out maybe to avoid some co-tenancies. Like how do you walk the fine line as you did with Sears or you guys own JCPenneys as well? Like how do you, from the mall's perspective, in totality, walk that line of buying the box, negotiating with them to keep a store open a little bit longer to not trigger co-tenancies until you can come up with a backfill plan. Is this -- how far long in the process could this be and how much capital would you want to put?

Yes. I mean, look, somebody shrinking their store profile is something we deal with for the last 30, 40 years. So this is not a big issue. Co-tenancy means nothing to me. To the extent that there's a Macy's store that closes, that triggers co-tenancy, it's de minimis to us. And we're always looking to put better retailers in there. And to the extent that there's a box there that we can either control through lease or buy at the right price and put a better tenant, and that's what we do day in and day out. But all this noise around co-tenancy and risk, it's just not -- what I'm trying to convey here if I've probably failed but I'll try my best. These little things are a nuisance but aren't determinative of our success. Our success is that we built this company that's unbelievably diverse. We are good investors. We know when to buy, sell, hold, redevelop, new development. We've done this in all sorts of different cycles, right? We've seen our competitive peer group kind of not have other issues and yet we keep moving the ball forward. That's what we're about. $12 billion of liquidity, $42 billion of dividends paid. And so if a company is shrinking their portfolio, we'll deal with it. And it's on the margin. Now I personally would do things differently. But because I have had the -- I've actually learned a little bit more about, like I said earlier, running a department store. And these stores that may have small volume but they generate EBITDA. So how are you going to replace that EBITDA? Are you going to do it by selling an asset? And doing it, just to make sure you understand how that math works, we're experts at it. And I think that's what everybody needs to factor in. And then as we all know, when retailers shrink, their e-commerce shrinks unless they have a replacement. We've seen the studies. We know the studies. We've seen it. We've seen it firsthand from Penney. And so again, it's not going to change kind of the outlook of what we've created here over a 30-year history.

You're setting a record with a number of questions that are coming in. So we'll try to get to many of them.

I can't wait to leave. I'll be back 7 years from now, hopefully.

We'll save them for you. So maybe a follow-up just on department stores broadly. And the question is just long-term trend of department stores and how that will impact, Simon.

Well, look, we're -- we've got less than we had a decade ago and we're doing okay. So the ability to redevelop department store space into higher productivity uses has been an opportunity for us. At the same time, we'd like to see department stores deliver what they're supposed to deliver, which is a loyal customer, a good selection of goods. And I look at kind of the -- I don't know what it is, maybe it's something in the water in Arkansas, but you look at Dillard's department stores, and they know their customer, they know how to -- their stores look good. The consumer knows what they represent, and they prosper. So it is possible to do that, but you can't just run from one idea to the next. You got to kind of stick to what you believe is there. So I think over time, we'll probably expect to have less of our boxes occupied by department stores. It's not something that we are necessarily pushing for, but we're adept at dealing with it.

Great. Another topic that is coming in on the questions, but also you guys have addressed more recently is just OPI and the monetization there. This question is specifically about Klépierre. Just can you talk about the time frame and kind of how you evaluate when you monetize certain investments, and then what's the best use of the capital to reinvest in different parts of the business?

Well, I would say -- again, just to take a step back and think about the company. So we've made these other investments that, by and large, and we've had some duds, but by and large, have been very profitable. Yet if we look at the monetization of that and what we can do with that capital, I'm indifferent. We're very clinical as to what we look at. So you take our outlet business in other parts of the world. We love that business. On the other hand, if we get an offer that we can't refuse, adios. At the same time -- and that applies to basically OPI or anything else. So trust us, and I think the marketplace should trust us that we have the understanding of when to monetize, when to go long and when not to. And then we also have the ability to withstand -- if our timing is not right, withstand the cycle. So we've been pretty good market timers. On the other hand, we haven't been perfect. So let's go back to the Mills, Mills we bought in '06, closed in '07. And if you remember, we had this thing called the Great Financial Crisis, I mean, it was kind of a child's play for what we have dealt with historically. But we were -- our operational excellence allowed us to weather that storm of bad timing, okay? Same thing with Taubman. I mean if you remember Taubman, we bought that brilliantly, February of 2020, right? When we made the deal, it didn't close then, but we made the deal, February 2020. And in March, the world was shutting down. So yet, even with all that said, we were able to operationally excel to make all of the numbers and math better than what we originally underwrote. So -- and it's a little bit of a segue. But I'd say we have this unique portfolio that's got investments around the world and in different businesses, but everything is for sale at the right price. And when we get the capital, we're going to put it back into the business, it's probably the #1 priority, which is kind of continue on our redevelopment. The interesting thing is on redevelopment. We're probably one of the few companies in our sector that is -- returns certainly should reflect the capital markets, but we don't need the capital markets to allow us to redevelop. You see what I'm saying? So most people need -- certainly, in the private markets, they need financing or they can't build. We can just build or redevelop without. Now we have to be cognizant of returns, but we can build without -- am I going to get a construction loan kind of deal, right? So I'd say, number one is continuing to redevelop or new develop where the returns are appropriate. And at the same time, look, our dividend is going to grow. And I think we're going to continue to opportunistically buy our stock back because we still think even though the stock has had a good run, when I look at asset values worldwide, worldwide asset values. And whether that's art, whether that's homes, whether that's tech stocks, whether that's oil and gas, I still don't see the -- and the fact that you can't replicate our portfolio, I still haven't seen the real run-up in asset values that I think potentially could come given the amount of capital that's out there and the resilience of our cash flow stream that does have an inflation kicker. So we're big believers that we can continue to invest in our portfolio to make it better. And then opportunistically, we'll be looking at reinvesting, buying our stock back if the markets become more volatile.

And how do you think about consolidation opportunities either domestically or internationally?

Look, there's still a -- we're not opposed to growing selectively, but I don't have a burning desire to do it unless the math is compelling. And there's a gap between the bid and -- the bid and the ask and I respect that, right? Because nobody needs to sell if they don't have to. So we certainly could. We've been good buyers of stuff, but I probably would put us less likely that anything material is going to happen over the next period of time. The other thing is we're just patient, right? So if you look at -- and I think you have a question here, there's -- our group retail real estate is really -- there's been a lot more public companies that have made mistakes. It's not jump on the industrial bandwagon, not done the tower. We could have done some of these things that I guess we were too preoccupied with M&A. So -- but our part of the little REIT world has gotten very, very smaller, right, less companies. So I think we can be patient and just wait for the right time. And but -- and it just really hasn't manifest itself.

You guys have talked a lot about the returns you've got in the OPI from a return to Simon. Do you feel like you've gotten credit in the stock price, even though economically, it's been -- it's made money? And does that also drive kind of the simplicity of maybe divesting some of these to reinvest that capital? Or is it just solely a market timing? And then if an opportunity comes up in 5 years, you're going to dive back in. And so it's just an opportunity set issue rather than a strategic shift.

Well, I think we've done all of our investments with the eye toward that it was important to what we were doing for the company, right? So I would just take a small example, Authentic Brands Group, when we made that investment, we were buying struggled retailers that we felt we could turn around and buying the intellectual property of those retailers and we believed in the growth that, that company was going to be able to generate. So -- and all sorts of marketing and all sorts of other opportunities. So there is a rationale to why -- it may not be apparent, we may not be great at explaining why we're doing stuff but it is connected to our business. So we're not drilling for oil, even though we can't lease mineral rights, which is -- but we're not actually drilling for oil. So it is connected to our business. Clearly -- and it's kind of an interesting evolution, right? So these were -- the earnings part of it was nonmaterial pre-COVID. Nobody cared. They weren't big investments. COVID, nobody cared about anything, but are you going to survive? Got it. Certainly, we understood that. And then suddenly, we had this great boom where JCPenney and the like were making a lot more money than we ever anticipated. And so then the materiality of the OPI became a little bit more -- a little more important, I guess. It never really reached more than 10% of our earnings, so to speak. Earnings being FFO. Then it reverted to the kind of the mean and now it's less, and there's been volatility. So the market doesn't like it. I respect the market on that. And because of that we're always going to look to monetize those kind of investments. At the same time, we do it because we think there's a strategic reason to do it. But today -- and again, there's a lot of focus on it. But today, we anticipate '24 earnings are a little more volatile, but it's under -- it's almost nonevent. I mean it's under, what, 5%, 3%, 2%? 1%, okay. So I should know the number. Hopefully, it will be better, right? Better than 1%, but it's 1% of our earnings. So the obsession with it, not that you've only asked 4 or 5 questions. So you're not at the point of obsession, but you're getting -- I'm kidding, you're getting close. The -- if we can monetize it and plow it back and the multiple is where we trade versus where we sell that makes economic sense, we'll do it. I wouldn't rule it out, but I have no desire to do other deals either.

I guess to that point, how do you think about the medium and longer-term compounding growth rate of earnings given the current leasing environment and maybe the minimalization of some of that noise?

Well, look, I think the only headwind that we see are interest rates and -- so we see comparable NOI growth at a pretty healthy clip going forward. We have the liquidity to, like I said, invest in the business that would fuel accretive growth. We'll continue to monetize assets that we can use to buy stock back or even pay down debt and sometimes it's accretive. So feeling pretty good, though, but the headwind is higher interest rates. I mean we were fortunate to finance a lot of our activity at low rates. And so I think like we have obviously a well-capitalized company but we do have debt. And so we've got to deal with that. That's really the only headwind that we see right now.

And you guys are one of the few REITs that are international in focus. As you look at domestic versus your international options, what's the most interesting place for you right now to invest an incremental dollar?

Well, what's -- again, this is more difficult. And we're really not going to put a lot of capital, but the highest returns tend to be our Southeast Asian new projects, outlet projects. If you just look at like pure real estate return on investment kind of numbers. Now they're hard to do. The financing costs are a little bit higher. We don't put a lot of equity. But so -- but that population is young and it's growing and the incomes are growing. So if you looked at it from a pure macro investment, and again, I mean this is -- you're not going to see a big portfolio of new outlets in Indonesia, okay? So relax everybody. But if you were going to look at just pure real estate returns, that's a very attractive area. And then obviously, building to the extent that we think an asset is worth this cap rate and at this mall here or this outlet, and to the extent that we can add to it or build to it, that's very attractive. So like take when -- jumps at me is Woodbury Common, we're doing Phase 5. And then we got to get the approvals. But making an asset like that, that center did in the fourth quarter, did close to $400 million of sales, okay? $400 million of sales in 1 quarter. So taking an asset like that and growing it -- in this case, we might add hotel, et cetera, more retail. That to us is a big focus. We've got this big project in L.A. that we're still trying to sort through in terms of all the development entitlements and risk. But those kind of things are kind of where we're focused on. Again, the good news for all of my peers in the retail world is that there's just no new supply, right? And I think we're all going to take advantage of that. It doesn't mean there's not going to be bad retail real estate, right, whether it's a strip center or a mall or whatever. But I think we're all going to take advantage of the fact that there's just no new supply.

Perfect. So I think with time running down, we're just going to run to our rapid fire questions. So first one, and we could just generalize this for retail. What do you think same-store NOI growth will be in 2025 for the group?

Well, I think ours will be at the high end of the range. Put it that way.

Well, retail, and I guess, hard with malls but have more, fewer or the same amount of companies this time next year?

One more time?

Will the retail space have more, fewer or the same number of public companies this time?

All of the retail, I think they'll be more consolidated. I think there's a lot of REITs. Generally, I think you'll see more consolidation, less REITs.

And last one, best real estate decision today for Simon, buy, sell, build, redevelop or repurchase stock?

Yes.

Thank you.

Thank you.