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

Just lost internet and COO, Eli Simon. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to LiveQA.com, enter code GPC26 to submit questions. Eli, I'll hand it over to you to introduce the company and team. Provide any opening remarks, tell the audience the top reasons an investors should buy your stock today, and then we'll get into Q&A.

Perfect. Good afternoon, and thank you, Nick and Craig, for the introduction. We appreciate the opportunity to speak with you today. Let me begin with the core principle that has guided Simon for decades, assets matter. When assets are built to last and located in the best market, their longevity generates sustainable growing cash flow. That has been the defining characteristic of our company for decades, and it continues to drive our performance today. Our assets stay relevant because we continually reinvest in them, redeveloping, densifying and curating the best tenant mix and enhancing the customer experience. This continuous improvement creates a virtuous cycle that extends asset life and compounds cash flow growth. Not many real estate assets last for 70-plus years. Ours can and do through disciplined accretive reinvestment and operational expertise, including most recently at South Dale Center and Edina, Minnesota, where we have reinvented the oldest enclosed mall in the country and made it more relevant than ever. Our strategy remains clear and consistent: own and operate the best retail real estate in the best markets, reinvest in our assets with high-return redevelopment, densification and mixed-use additions to drive long-term value creation, pursue disciplined accretive acquisitions where we can add value and innovate to enhance both the consumer and retailer experience. 2025 was an exceptional year and a validation of our model. We delivered record results across all key operating metrics, including revenue, NOI, real estate FFO and dividends, supported by strong retailer demand and increasing shopper traffic. We completed $2 billion of strategic acquisitions, including the remaining interest in Taubman Realty Group, our partners' interest in Brickell City Centre and the Mall luxury outlets in Italy. Each of these deals enhances the quality and long-term growth profile of our portfolio. We completed significant redevelopment and expansion projects, transforming former department stores into high productivity experiential environments and expanding our mixed-use components. Our active development pipeline is $1.5 billion with a shadow pipeline of more than $4 billion that will start over the next few years. Approximately 40% of that pipeline is in transformative mixed-use projects at iconic properties, including the Town Center at Boca Raton and Fashion Valley in San Diego. Our financial foundation remains rock solid with our A-rated balance sheet continuing to be a defining advantage. With more than $9 billion of liquidity and over $1.5 billion of annual free cash flow after dividends, we have the flexibility to reinvest, acquire and return capital to shareholders while maintaining disciplined leverage. As we look ahead, our conviction remains strong. Demand for high-quality physical retail remains strong and consistent, and retailers know that operating stores is essential to profitable growth and new supply remains limited. Our continually improved portfolio will support durable cash flow growth for many, many years to come. Our strategy is clear, consistent and proven, and our platform is exceptionally well positioned for long-term value creation. Thank you, and we look forward to your questions.

Great. So if I synthesize that or maybe you can synthesize that down, what are the, let's just say, 2 or 3 reasons investors should buy the stock today?

Yes. The first, as I said in my opening remarks, assets matter and our portfolio is unrivaled. Demand remains strong and consistent across the portfolio, across all categories, apparel, food and beverage, experiential, entertainment and the like. We're coming off a record year, as I mentioned, '25, and that momentum has continued in the beginning of '26, and we look forward to it continuing. We also have a strong proven track record of disciplined investments, both external growth opportunities as well as our development and redevelopment pipeline, which remains strong and is growing with many very high accretive projects hoping to start over the next 2 to 3 years. And finally, as I said, our balance sheet is a significant competitive advantage. We generate over $1.5 billion in excess of our dividend each year, which allows us to reinvest that free cash flow into high accretive opportunities and which will continue into the future. So bottom line, I think no one is more cycle tested and has overcome various external threats more than we have, and we are very excited for that to continue into the future.

Yes. Well, it certainly feels like a good moment for retail broadly right now. I feel like the market and the question that we get the most frequently is how could AI disrupt these different businesses. I want to get into Simon specifically, and I know you've been active and on the front foot about deploying AI in different technologies over the years. But maybe starting more broadly on retail and what you're hearing from your tenants and the retailers directly about the opportunities and risks that they're seeing from AI today?

Sure. I think from the retailer's perspective, it's a potential new avenue of growth, a new avenue to drive sales. But from a physical retail perspective, nobody is looking at it and saying, well, I'm going to replace my physical stores with an AI agent and with my e-commerce only. I think it's been pretty clear and proven at this point that the way to grow profitably is to open stores. It's a better customer acquisition cost. It creates better long-term value. And what we see and when we talk to retailers is they want to open stores. They want to be in the best markets, and that's what our portfolio provides them. And so we're not hearing any negativity from the retailers. And hopefully, it's a positive more sales for them is better. If they can operate their businesses better, we obviously own stakes in retailers, and so we understand that business. They are going to -- our retail investments are going to find efficiencies operationally from AI, which only benefits us as now we have -- we'll have better financially healthy tenants. So we look at it as a positive and not really focused on any potential negative outcomes.

And then how about internally within Simon, the opportunity to either be more efficient or...

Of course. We look at AI like we do any other investment, whether it's we're looking to partner with somebody, build it internally, buy something. It's incredibly disciplined. We look at every single nickel in the company, however we spend it, whether it's overhead, technology and our capital projects and our operating expenses. And so we'll continue to do the same with AI. We've obviously used it and had success across various departments across our legal department, our marketing department, we have 30,000 tenants or so that all have different needs, different imagery. We have 200-plus properties in the U.S. And so if we can create materials for them, create pitch books, et cetera, faster, that only benefits us. And then lastly, obviously, on the data side, we have a tremendous amount of data. We're in the early innings there, but really being able to take that data, use it better, use it more efficiently and then ultimately, find ways to monetize it, which we've started to do, very excited about that, but early innings, but will grow significantly from here.

We had a question come in that dovetails on this. What initiatives are you developing around retail media, the use of customer information to synthesize the data, better bring in foot traffic and maybe partner with tenants and retailers?

Sure. So it's sort of -- I look at it as 2 facets, right? One is our internal use. We have better data, better ability to use the data to allow us to lease better. Allow building programs internally, allow us to have a better understanding of what tenants need to be, where, how they will perform, which is only going to make us better operators. From the use of data going forward, we've launched a retail media network, launched it last year, continuing to grow it this year. But basically, if you think about it, we have 25 or so million people in our consumer database that's built up over time. We launched our loyalty program in November of last year to get more granular data on those consumers. But I think it's a pretty attractive data set for both our retailers, but also a broader universe because that 25 million people is a part of a cohort that spends $100 billion a year in our assets, a couple of billion visits a year, a few hundred million, 200 million, 300 million individual shoppers. So clearly, that is pretty powerful. We're in the early days of harnessing it. Obviously, AI will help us, but it's something that we're really focused on top to bottom of the company right now.

And maybe beyond the efficiencies at a corporate level, from an operating expense or maintenance kind of preventative maintenance, right, what are you guys doing at the property level? Or what good technology is there out there, if any, at this point to really help modulate heating, cooling expenses and lighting and all the things that kind of go into it and can minimize CAM.

So it's something that -- it's not like we just woke up and saw the word -- letters AI and said, "Oh my God, how is this going to help us operate better." Right? We've consistently over a very long term, invested in different platforms and different ways to be more energy and efficient, run our properties better. So all -- we view that as just a continuation. So what might have been a software program before now might be AI backed, and we're continuing to trial things. And the good thing for us is when we talk to potential providers, if we find something that works, they see the ability to roll it out across 200 or so assets in the U.S., which means that we're going to get that first phone call when people have interesting ideas, and we take those calls all the time. And we're starting to see interesting results. It's obviously very early, but energy cost is something we are very focused on and think that hopefully, there are real savings to be had there.

And to circle back, in your prepared remarks, you highlighted the $4 billion of potential kind of development, redevelopment within the pipeline. Maybe talk a little bit about how much of that is Taubman related now that you guys have full control of it versus legacy portfolio. And maybe a range of returns or how we should think about that incremental capital spend?

Sure. So I would say, honestly, the $4 billion, I think, has basically none of Taubman because that was sort of in plan before. We obviously announced right after earnings that we have a $250 million 3 projects in Denver, Cherry Creek, Nashville, at Green Hills and Tampa International Plaza. We are incredibly excited about those projects to make really good assets even better that, frankly, should have been done a while ago. We didn't have the ability to do it. Now we are going to do it. But that $4 billion is the vast, vast, vast majority of it, if not all of it, frankly, is our core portfolio. From the Tower portfolio, if you think about it, they had an independent balance sheet, not the $9-plus billion of liquidity we have. And so some of the assets do need capital. We've highlighted those 3 is where we think we can have the biggest and best returns. But we're going through property by property and have been in the last several months, looking to see where we can merchandise better, where we can make the properties look better. And so we'll continue to do that. We look at it not as a 2026 story, but these are assets we want to own forever. And that's why we did the deal initially. It's why we bought the next 4%, the next 4%, the last 12% because these assets are great assets that we want to own for a very long time. And then going to your return question, I think the $1.5 billion is at 9%. I would say 2 things on that, right? Obviously, that's a lot of assets in there, right, a lot of different projects. We'd expect the pipeline, the shadow pipeline, I should say, to be similar. But you should note that we're -- I wish we were building multifamily to a 9%, right, but we're not, but we're building at 150, 200 basis point spread. And so if you think about that as a 6.5 or so, a lot of the other projects then are higher than that, right? 40% or so of the pipeline is mixed use. Then the other thing, which I do think is important to note is when we underwrite that pipeline or provide those public returns, that is truly the cash we are spending in the box of what we are doing, right, whether it's a department store redevelopment, what we did at South Dale, the exterior renovation where we added luxury. What it's not doing is picking up all the other benefits that we're getting throughout the property, which to be intellectually consistent, but that makes that number obviously much higher, right? And you look at South Dale, that doesn't take into account the 40, 45 new tenants we've added since we announced and started construction of the luxury redevelopment, which is now open. And those tenants are outperforming those like-for-like tenants that have been at South Dale for a while are outperforming that same tenant in other malls by 1,000, 1,500 basis points because we revitalized a 70-year-old asset. And so yes, it's 9%, which that in and of itself is obviously very good, but we do know that there is a lot more accretive returns that are beyond that with what we're doing.

And what's the tail on this from a time frame on that $4 billion? Like when should we expect that to hit? And what is behind it? I know you have Taubman, but as you reevaluate the portfolio and continue to re-underwrite or bring in new assets, what could that kind of additional opportunity be over time?

Sure. So I guess on the first part, on the $4 billion, I'm hopeful that, that starts over the next several years. maybe AI can disrupt how city planning in some of these towns work, so they can be quicker because it's not an issue of our desire. It's not an issue of our capital or the tenant demand. It just takes time to get through some of these processes. But I would expect most of that to start over '27, '28, '29. But then you got to remember that some of these projects at Fashion Valley, that's going to be a 3-year development, right, an iconic asset in San Diego that we're going to add multifamily, flagship retail, world-class restaurants, et cetera. And so I think it's important to note that it's not just when we start, but this capital does get deployed over a multiyear process. And then behind the $4 billion, we are just scratching the surface, right? Again, it's not -- has nothing to do with capital constraints. It's where is the best use of our time. And that's what this $4 billion has determined, but we continue to look at our portfolio every day because if we're not making the asset better, inherently, it's getting worse. And so we say, okay, where is the next asset that we can put significant dollars in to make it better the next South Dale, the next Brea in Orange County, which is near the end of that significant work. So we think there's a lot behind it. $4 billion, I think, is not too bad, but we'll continue to grow that over time.

And you guys have historically been opportunistic as well on the direct real estate or direct retailer side. I know that a couple of years ago, you pulled back a little bit because maybe you're getting some feedback from investors. But as Saks comes and some others potentially down the road, how interested -- I know you guys already have an investment in Saks, so that's maybe a redundant question. But going forward, like the -- if you have this level of potential redevelopment or use of capital within the existing portfolio that's a little more organic, probably a little derisked, that versus the appetite to continue to be opportunistic. Just kind of curious how much capital maybe you set aside for those relationship or strategic investments versus the -- just the straight up real estate side?

Yes. I mean I think it's, as you said, opportunistic. We're not looking for it. If somebody calls us, we'll take the call, and we'll look at an opportunity. I mean, from a capital perspective, you got to remember, we have very, very, very little net cash in these deals. We put in a little cash to begin with, and then we've returned a significant amount of it. So earmarking anything would be silly because it's de minimis relative to liquidity we have and the other uses of cash. And so if there's something interesting, can we do it? Of course, but we're not actively looking at it. Obviously, with our investment catalyst, we're happy, right? I think the management team there has done a great job, but we're not actively looking to do anything. We think we got a great opportunity in our existing portfolio and let's just keep making these assets even better and driving cash flow growth, which is what I think we're the best at.

Any questions from the audience? Opening up for a minute. Nope? All right. On the leasing side, the demand has been strong. The execution has been strong. As you talk to retailers, the tariff issue, SCOTUS slapped it down and the administration came right back with another avenue. Kind of how is that uncertainty or extra cost essentially factoring into conversations you guys are having as tenants are looking to lease or they're looking to figure out their cost structure and margins and your OCRs factoring all that in?

Sure. So I think a couple of things. First is tariffs and sort of changing supply chains is not a new story. This went on pre-COVID and the First Trump administration and has been continuing to today. So that, I think, from retailers, their flexibility is a lot better than it might have been 20 years ago. And so that's first and foremost. Second is when we had our earnings call first week in May, so a month or so after Liberation Day, I think we said on the call that there were 4 or so leases that fell out, right, out of -- we signed 4,500 leases last year and 4 or 5 fell out because of tariffs. Well, we're sitting here almost a year later, and the number is still 4 or 5 leases fell out because of tariffs. So we don't see that changing. The conversations we're having are good. Retailers are looking to secure renewals on their space going into the future more because they realize that if they have good space, they want to keep that good space. And so we're working on not just '26 renewals, but '27 and '28 renewals with some retailers in certain circumstances. So obviously, it's fluid. We're cognizant of it. Could there be some impact on margin? Of course. I think the retailers, though, by and large, have done a good job of figuring out how to minimize it. And we'll see what happens, but we'll be ready to react either way. But as we sit here today, the leasing pipeline is still very strong. It's still north of 15% above where it was this time last year. So even after 10 or so months of tariff noise.

We had a question come in through LiveQA specific to Klepierre. How do you think about the success of that investment and keeping your capital in the deal longer term?

So I think the key word you said there is investment, and we view Klepierre as an investment. And an investment by its definition, we can hold an investment or we can sell an investment. And so that's how we look at it. Obviously, it's been very successful. We're proud of what we've done over the last 14 years. We're proud of how it's performed, but it's an investment. And so we will evaluate it every day and determine if it's an investment we should keep or it's an investment that we have better use of that capital. But otherwise, sort of business continues as usual.

In regards to the exchangeable, I know I think we had talked, you guys have the ability to pay back in cash, you have the ability to put shares. You mentioned you did put a little bit of the investment back, a very small piece. As you guys go forward, how should we expect that debt to be paid off, could you liquidate more of the investment there through the payback of it? Or did you kind of rightsize what you guys wanted to rightsize and now you pay back with cash?

Sure. We'll look at each and every exchange as they come in to the extent they do and then decide at that moment what we want to do. As of the earnings call, we had exchanged 1.5 million shares out of our 63 million, 64 million shares. Obviously, it's not a huge percentage, but we'll evaluate each exchangeable notice to the extent they come in and sort of determine what's best for SPG at that time.

Kind of pivoting a little bit, and it goes back to maybe the investment piece. You guys bought Jamestown a few years ago. It's been quiet on that front, at least externally, right, what you guys are doing with them. Is there anything near term or on the horizon or maybe even in the $4 billion that you referenced that leverages that platform over time? Or how should we think about that relationship going forward?

Sure. It's a great relationship. I was talking to Matt and Michael, I think, on Wednesday or Thursday last week. It's -- I would say the $4 billion is just SPG, right? And I would think of it less as what Jamestown is giving to us versus what we are giving to Jamestown. And so they're working on -- they closed on a transaction in Charlotte not too long ago in the last couple of weeks. They're working on a transaction in Berlin that's closing soon. They're looking at a couple of large mixed-use sports-related developments in Tampa and in Atlanta. And so we provide input, we provide expertise, maybe down the road, depending on how those deals get capitalized, we maybe provide capital. But it's a great relationship. We're 50% owners, right? So we don't control it by any means. It's an awesome management team who's doing a good job. And so we talk to them weekly at least and to continue to find ways to grow that platform. It's an investment that we're happy we made and we'd like to continue to grow it.

The goal is to grow AUM and ultimately, that is what we're kind of focused on, and we expect to see that in the near future with that platform.

Is there ever an opportunity for you guys to do -- or them to do a fund with you guys contributing assets, taking outside capital? Could that be something down the road? Or is it basically you guys just want an asset management arm, maybe you introduce them to some people they might not know to get their AUM up and kind of enjoy the fees, the high profit margins on that?

Never say never, but I think it's more the latter, right? Because if you think about, by and large, our portfolio, the assets we own, we want to own outright, right, or our share of what we have with partners. And so to contribute it to grow their AUM in a business that we own 50% of versus what we can own and what we can control our own destiny, that's much more interesting. But we do develop interesting capital relationships with Jamestown, right, they do talk to large institutional investors on the private side that we might not really have a need for, frankly, maybe one day down the road, we do. But that's an interesting angle for us to develop those relationships. We look at it and say, we have boots on the ground in literally 100s of markets or north of 100 markets across the country. And so basically, any asset that Jamestown is looking at to underwrite is the market that we know. And so that is pretty valuable intel when they're looking at going to raise capital and they're talking to the large institutional investors. Not too many people can say that. And so we think it's additive to their platform.

We had a question come in. I know you guys addressed this a little bit on the call, but maybe an update on the expectation for the Saks bankruptcies. How many stores have you gotten back? Do you expect any leases to be bought in auction?

Sure. So you have to separate, right, the Off 5th and the full-price department stores. On the Off 5th, as we said on the call, I think we have 38 stores that pay $18 million. And effectively, they have rejected the vast, vast majority of those. And we're going to take that $18 million. And based on where we are today with about half of those stores, that's a $30 million rent roll. And so based on the rest of the stores, that should more than double the $18 million. All those are in the outlets and the mills. And so that is going well, low paying, low productive space in very good locations. I was at Silver Sands Premium Outlets last week. We're going to take their box. It's in a prime corner of the center. And we have a deal with a great retailer that will do literally maybe 10x the volume, if not more, of what Saks is doing -- Saks Off 5th is doing. On the full-price department stores, that's early. We'll see. Obviously, we announced at Copley, the Neiman Box that we're going to redevelop and add multiple restaurants that will do over $100 million in volume and new -- additional new luxury retailers. And then we'll see where the rest of the full-price stores shake out. But either way, if Saks remains as a going concern, which I think would be good, generally speaking, for the industry and for the environment, then that's fine. And if something worse were to happen, their stores are in great centers, and we've obviously been thinking about alternative uses. And so we'll just see how the bankruptcy plays out. We're prepared either way, and it's not the first time we've dealt with something like this.

Another question come in. How have tenant sales or traffic trended year-to-date relative to trends last year?

Yes. So through January, both sales and traffic have accelerated where they were in the last couple of months of the year in '25. So it's obviously early February too early to know, to have a read on. But I think anecdotally, similar-ish, but kind of crazy weather in parts of the country that might not normally get it. So don't have a great read on February yet, we'll see. But through January, have accelerated both the growth in sales and the growth in traffic over the last couple of months of the fourth quarter last year.

You guys have done a fair bit of outlet development overseas. Just kind of curious with the geopolitical risk going on and what's going on over the weekend, just does that delay or change your underwriting at all on the decision to kind of put capital outside the U.S. on the margin. I know where you guys own is not where this is going on, but clearly, there's...

I mean obviously, we don't own in the area. So that's not -- and frankly, not really looking in the area, that's not a concern. I mean when we look at international development, which we -- right, our most recent asset was in Indonesia last year, to the extent we're taking country risk, we're going to make sure we're earning the right return. So it's just a higher return threshold, but we obviously evaluate it very, very closely. I don't want to say we scrutinize it more than something we do here because we scrutinize every $5,000, $10,000 decision very closely to make sure we're not wasting money. But on the international front, we have a few new deals or a new expansion in Japan -- an expansion in Japan, a new development in Korea that is supposed to start later this year. Let's see where the geopolitical environment is. The great thing is we can do it or we cannot do it. And that's funded basically by those portfolios with those partners. So it doesn't really sweat either way. We're not really sweating either way, but we'll just evaluate each one. We have a very stringent criteria when we go overseas. And obviously, it's been incredibly successful so far, and we're proud of the assets we have.

And then in terms of capital allocation priorities, we had a question come in if between expansion of malls, outlets, densification of other uses, how do you prioritize those? And then how do you think about either larger cities or more secondary cities?

Yes. I mean we prioritize all. We do all, we'll do all and are excited about all. And so this is -- there's no issue resource-wise, both in terms of people or in terms of capital at all, right? We're generating $1.5 billion after dividend to fund the pipeline and while naturally deleveraging. So it's not a concern. It's each individual asset, what's the best decision for that asset. Sometimes like a Boca, just one of my favorite malls, frankly, and one of the best malls in the portfolio. We have an opportunity to do something incredible to add a hotel, multifamily, great retail, great dining. We're going to do it. In other markets, it might make more sense to do sort of a box replacement or maybe a small restaurant outlay, what we did at Mission Viejo, where we added a handful of restaurants outside and a couple of furniture users. So we look at each and every asset, what's the best use of that asset, not where are we putting money because if we do something here, we can't do it there. And then on development itself, obviously, we've announced what we're doing at Sagefield in south of Nashville and Franklin, which we could not be more excited about, a little bit different than what we've done in terms of the style, truly taking into account the beautiful layout where it is. And -- but retail demand for that has kind of been unlike anything we've seen. in terms of the quality of retailers that are excited about that. So that's obviously going to really start picking up later this year and open in a couple of years. And we continue to look at new development opportunities, less so on the full price side, probably more on the mall side -- sorry, on the outlet side. But those will have to be deals that we want to do that we think generate an attractive return.

Debt spreads have been coming in for the REITs, especially the larger, more highly rated REITs. What's your view on need for capital in the near term? Kind of how should we expect or should we expect you guys to tap that market to take advantage?

Yes. I mean, Craig, we're regular funders in the secured, the unsecured market. I mean we're not raising incremental capital. We're funding our business with free cash flow. So really, it's just replacement debt. Markets are wide open. We did an offering earlier in the year, 5-year offering at 65 over treasuries. In the history as a public company, we've only issued a 5-year tighter one other time. So the markets are open. The secured markets are opening and pricing efficiently. So ultimately, we will be very active again this year as we are every year, probably have about $10 billion of total financing to do between unsecured and secured. We still do face higher interest rates than the coupons we're rolling off. We benefited during the -- when interest rates were at 0. I was actually kidding with David that we will have rolled off our last 1% coupon next year. And so we are still getting tight pricing, but base rates certainly are elevated relative to recent past.

We have our rapid-fire questions in the session. What will same-store NOI growth be for, let's just say, retail overall next year in 2027?

Less than ours.

Any specific numbers?

Still less than ours.

Will there be more or fewer of the same number of retail REITs a year from now?

It doesn't impact us.

Broadly, do you expect M&A across retail REITs?

We'll see. It doesn't impact us.

All right. Thank you.