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

Everybody, why don't we get started. So good afternoon. Welcome to the Simon Property Group roundtable. I'm very happy to have the Simon management team here with us today. Simon CEO, Brian McDade, CFO. Let me turn it over to you, Eli, with some opening remarks.

Great. Thank you. Samir. It's great to be here. I will keep this brief so we can get to your questions. Overall, leasing demand remains unabated. Big picture that the operating environment remains very favorable for us. Retailer demand is strong across our platforms across categories, across geographies. Retailers continue to prioritize physical stores and demand for our space and our portfolio remains robust. Through the first half of the year, we signed more than 2,300 leases totaling over 9. 5 million square feet. Approximately 27% were new deals, and our pipeline is running well ahead of last year's pace. New deal rent per square foot is up 17% versus last year, while TAs per square foot are down 12%. Demand spans apparel, dining, entertainment and health and wellness. And what excites me most is the new and emerging brands coming to our centers from online, from Europe and from Asia. Consumer is showing up and continuing to show up at our centers. Shopper traffic is up and accelerated throughout the back-to-school period. Retailer sales are also up alongside traffic that's broad-based across categories, geographies and platforms, which are all positive. We continue to invest in our portfolio. We have approximately $1.1 billion of projects under construction at a 9% yield, roughly half of which is mixed use. Another $600 million is expected to start by the end of the year, the pipeline of more than $4 billion behind that. We also continue to reinvest into our portfolio with large-scale renovations and center enhancements. These investments are noticed by our customers and more importantly, by the retail community. We own great assets and never stop investing in them. We take a long-term view, continually reinvesting through renovation, redevelopment, and enhancement project to make our great assets even better. As a result, many of our properties are more relevant today than when they were developed decades ago. Great assets matter. And so does having the patience and discipline to continuously improve them. Our naturally deleveraging balance sheet gives us tremendous flexibility to fund these opportunities while also maintaining a disciplined approach to capital allocation. So overall, we feel very good about the position of our business today. And with that, happy to get to your questions.

And I'll start, but let's keep this interactive. If anyone has any questions, please chime right in. On the leasing side, occupancy is around 96%. Where do you see the biggest opportunity to drive core growth from here?

The biggest focus, which has always been our focus is to make sure we have the most relevant merchandise mix out there. And that's, I think, what separates us from, frankly, anybody else is that our centers are going to be home to the newest, the greatest, the best brands out there, whether they're coming from online, coming from Europe, coming from Asia -- so occupancy has room to grow, no doubt. And I think I said on the last call that we anticipate being above where we were at the end of last year. We still anticipate being above where we were at the end of last year by the end of this year. but we don't stop them, right? We don't stop and say, okay, we've hit our peak occupancy, we're going to take a break. -- we say, okay, how do we make these centers better, where do we move tenants, where do we find new tenants and so it's that plus the continuous reinvestment of the assets we're developing, we're redeveloping. We're adding square footage to centers. We're adding exterior facing, we're adding outdoor square footage, adding new restaurant pads. We're doing it across the country in big centers and small centers across different platforms as well. And so when we look at it, we have tremendous demand, tremendous demand for our product today. And so our job is to choose the right tenant and the right tenant for that space and then go to the next center and keep on doing it. And so we're excited. The pipeline remains up 25-plus percent similar to how it was at the end of the second quarter. And so now our job is to just continue to execute on that.

The leasing pipeline?

Yes.

How was the the consumer holding up here, right? Clearly, a bit of noise outside in the macro here. A lot of questions from that perspective. Like what are you seeing across your platform today? And kind of whether it's discretionary or kind of necessity what are you seeing on.

The consumer has remained healthy and has had 0 slip up from when our last earnings call. And if you look the second quarter sales comp sales were up, I want to say, 5.7%. Traffic in the first quarter was up 1.3%. The second quarter was up 2%. And in the quarter to date. So July and August, it's up 3.4%. So the consumer is coming sales are up. I think our customer, I think most people don't know what the tenure is at, right? I think people in this room understand what the tenure is at, but most people do not they understand where their equity book is at. They understand how they feel unemployment is down, wages are up, shoppers are shopping and our sales are up. And so we've seen no change to the consumer back to school across the board, across geography, across platform, all the retailers we speak with everyone, not just met expectations but actually exceeded expectations. And so we're very pleased. Obviously, things can change, and so we monitor it in real time, literally today, but we have not anything to make us think that the consumer is having a material pullback in any way.

I was just going to say, how does your scale size benefit or help you grab that market share of the leasing. So let's say, there is that new international retailer -- how is the business international, domestic interacting to help drive that.

Yes. I mean it scale and share what we focus on is our relationships and we think we have the best relationships. And so our job is to make sure we have the best relationships with the retailers. We have a team that goes and gets on the plane and goes to Asia, gets on the plane, I met with a CEO from the U.K. to a great brand that has 1 store a day, and I think we'll have 50 stores in the next several years. And so -- we view it as our job is to make our properties great, make the properties that tenants want to come in and then go find new and emerging brands. And I think we've done a pretty good job of that. We've got more to do, but we're going to continue to do it. And we look at it and say, there is no doubt that the U.S. is where retailers want it for growth. I think it's sort of that's not debatable anymore, right, with what's obviously gone on in the Middle East for sure what's going on in China. Obviously, Europe has its own challenges. So there's no doubt if you want to grow, you have to grow here. And so we like that we're long U.S. retail real estate with those factors.

I mean, I guess I would only add to that, like the scale, it's important what have you, but it's about relationships, and it's about the bargain that we stand up to our commitments, right? The retailer community knows what they're getting when they do business with Simon across the spectrum. And so that repeat business is really important because -- that is not the case away from us by and large. And so knowing what your experience is going to be knowing what the -- that we are going to execute on what we say we're going to do carries a lot of weight in the overall scheme of our ability to generate business.

I mean you talked about scale. I mean you've got a big platform. You launched Simon Media Network recently, right, which allows brands to connect with consumers. I guess -- and given the amount of consumer data you have out there, like help us understand kind of how you see that enhancing the platform over time?

Yes. I mean listen, it's, I think, literally launching October 2, right? So we'll see. But -- we're bullish. We have hundreds and hundreds of millions of visits a year, tens of billions of dollars in sales. There's obviously a handful of really large retail media networks out there. Are we going to be that big? Probably not. But do we think we can have a real business. If you think about our customer is going to the mall or going to an outlet center to shop. That's a pretty high propensity to spend customer. It's, generally speaking, the higher income demographic. And so I think what we're seeing is, since we put out the press release 2 weeks ago, maybe 3 weeks ago now, we had a ton of inbound. But what's interesting is we had a ton of inbound not just from retailers who that's sort of obvious, but from travel and leisure companies, airlines, hotel brands, credit card companies, right, other types of companies that sort of say, "Oh, that's actually a pretty interesting data set to target because if you're going to the mall, you're going to the mall to shop, right? So you know this is a qualified customer. So we'll see. But this is a the sort of the next leg of a journey that we've been investing into our media business and our advertising business at the malls for long before it was cool and people came up with names for their programs. We've been doing this for a long time. We have over 4,000 screens in our centers. We're adding more proved on Monday, another , I forgot what it was 10, 12 centers. We're going to do another set in October. We're continuingly adding because brands realize this is a great place to capture eyeballs. And so I think it shows that people want to be at our centers. We know what the shoppers do. We know what the retailers do. I think now the broader advertising community sees that as well.

You like this time as -- this time last year, you talked about the app. And I think you started talking about 1 million sites you mentioned that 1 of the most search data was.at that point -- so I'm just curious how the app committee interaction with this business and the city trades that you're seeing lately with that data that.

Yes. No, 100%. So yes, so we launched Simon Plus a little bit after this time last year. That was -- it was basically done, and we kind of waited towards holiday. It's been awesome. And what's been great is it's giving us great insights of -- I don't like using names, but if you go to store A, you also want to store B and C. And so as we think about our merchandising mix and our discussions with tenants, that's really insightful. And that's sort of something that, frankly, nobody else can have sort of that scale. And then we know what you do online onshopsimon.com. And so we've created this ecosystem, both physical and online that gives us real-world data points on what the consumer is doing. And so we use that for our media network, but also for our own an understanding of what retailers are trending, what categories are trading. And so we -- we use it, our leasing team uses it. We have a new data team that analyzes it, see where things are spiking by parts of the country, by type of platform outlet malls, et cetera. And so it's pretty cool. We're early days, but we feel pretty excited about the opportunity here to do something that, frankly, nobody can do.

It gives us an opportunity for first part of the data collection, right? We as the landlord we're traditionally behind the retailer with their point of sale, but by using our loyalty program and appreciate the otologist that's happening in our assets. And so -- that gives us a leg up in life point to monetize it, but also to better operate our business.

So a decade ago, Amazon and e-commerce who's going to wipe you guys out is ever going to a mall again. That obviously hasn't happened. But let me ask you about genetic AI and as 1 theme and then convenience is another thing combining the 2 of them, agentic AI and convenience, I just want my stuff delivered. I don't want to do what people as higher gas prices, I don't want to be bothered. How do you see that the combination of those 2 things today and given where agentic AI is going. And then secondly, a very separate question, but very basic. Which of your tenants and brands are you most excited about? And which ones are you most worried about?

This is recorded, right? -- using names -- there's a lot of -- there's -- I would say there's -- I'd say there's a lot of companies or there's a few -- I don't a lot of these names but there are few companies really targeting the Gen Z customer today that we're incredibly excited about and that we're adding throughout the portfolio. I don't like the same. But on the agentic AI, I actually think it's fantastic for us. And I think it's fantastic for us for 2 reasons. One is, as people become more and more on their devices, not talking to other people, we've seen and come out of COVID, and we've seen this now for a number of years, people want to do things. They want to come to the center. That's why our traffic is up. They want to hang out. They want to go to restaurants, they want to go to the movie theater. They want to take pictures. They want to hang out with their friends. And that's from all age groups. Our biggest growth is the most online group, right? The Gen Z customer and even the generation behind it. There are the ones who are driving a lot of the growth in the mall right now, and they're driving it because they're phone all day, their teachers are now AI, right? They're not -- they don't have sort of that normal experience of let's go hang out our friends and sort of this is the place to do it. This is the proverbial town square in so many of the communities across the country. So on that end, we feel very excited. On the other hand, if you're a retailer, it is so hard in an agentic AI world to control your brand presentation, right? You -- on your own website, xyzretailer.com, it's very easy to control your brand presentation. Well, if now all of a sudden, people are getting there through pick your AI agent. You're not going to build to show them your full breadth and depth of your assortment of what your brands about, right? The packaging the -- what does the store look like? You can't do any of that now, do it online to some degree, but you can't do it. You can't -- I mean, again today, and I don't know how you're going to be able to do it in sort of a pure -- on a chatGPT. That's just not going to show up. And so that makes stores even more important because that really is the best place to control your brand presentation to say this is what we're about. This is our customer. This is who we're targeting. This is our full assortment of our top merchandise. And I'd say it's your best customer acquisition vehicle. There's no other customer acquisition vehicle that's going to come close to it. And if anything, it's going to become harder to find those customers on a social media platform on Google, et cetera. It's going to be a lot harder. And so I think it's actually incredibly bullish for us because you're going to have to want to be a brand and you want to be in business if you don't have a store fleet that is updated, that's modern, that looks good and that reflects the brand the way you want to do it, you're not able to do it anywhere else. And so for those 2 reasons, we think this is great for us. We really do. And people can say, right, it's going to go away. And that's -- we'll keep growing cash flow and growing NOI in the meantime and paying a growing dividend and sort of in 10 years. That will be the next thing. And then people say, well, 10 years ago, AI was going to kill them all and whatever the next thing is. So we feel really good about it, really good about it.

With the data in last year, again, I think tied to what Sara was talking about that, the membership program I guess how is that helping you improve the shopping experience? You talked about how you're using it to help with, let's say, leasing maybe even development. Is it tying back to what you said earlier, maybe that how you're curating the malls, who you're bringing in, but yes, how is it helping the shopping experience? And is this also early stages that you think over time you can keep pulling in more traffic to your centers?

Yes. I think 100%. I mean, it's all the data, all the insights, but you're literally -- if you're a member, you're getting rewarded for -- if you shop at any of the stores in the mall. So unlike if I'm a member of this retailer's loyalty program, and I go to the mall, and I only go there but I go to 2 places we don't get loyalty. But here, you get if you're a member of our program, you get loyalty points for all of it, plus the loyalty points you get from the actual retailer itself. And then we have the ability that the customer has the ability to earn the rewards online or in store. And so it's actually a tremendous value proposition, and we're seeing it. Again, it's not even a year old, and we've added millions and millions of customers. But it's a tool that as it gets more mature and obviously more awareness, people are going to realize, well, I can get points, I get my Amex points, right? I get my Simon plus points, I get my retailer's point, "Hey, you could stack it on top of each other. And then I'm going to go and get a free pretzel or go get a big discount at this retailer or key chain at this retailer, right? We have -- I have thousands and thousands of different rewards on there. So it's cool. And we think it's -- we're as bullish, more bullish than we were this time last year sort of right before launching as it is today almost a year into the program.

But I think, Jeff, it is also allowing us to understand the shopping pattern of people. and consumer and making sure that we're organizing our stores around neighborhoods. You've seen a big change in our business in the last decade around putting like tenants in similar neighborhoods and shopping next to each other. A lot of that is just informed by our data and you can see the cross-pollenization of shopping, putting XYZ, athleisure brand next to why athleisure brand. They don't know what's happening other than what's in their own stores, but we have that visibility of that halo effect of being able to look down in getting better productivity. So we're making better merchandising decisions on just simply where retailers are going in our centers by having a better understanding of the consumer and the tracking patterns we're seeing.

You took back about 1 million square feet of space, right? In the quarter, even with that very strong occupancy you had, but with the space you took back boxes talk to us on kind of what's been sort of the re-leasing, where does that stand? -- what sort of conversations you're having, just to give us an idea of demand.

It's done, right? I mean the it was sort of what I said last quarter, maybe I should have been clear, I guess. But I mean we took the $18 million to $44 million. It's basically all signed, if not out for signature. It's a retailer, we move on. We added better retailers, it wasn't even a blip on radar. It was normal order or, of course, where we got really good real estate back. We're happy when we get really good real estate back, we lease it at higher rents, and we go on with our business.

Mean it's a function of -- it's an indication of where supply and demand in the marketplace, the fact that we could absorb million square feet and release it in 90 days is really a function of just the backdrop that we're seeing across the from Simon perspective across the U.S.

And that's all rent paying and coming through end of this year.

Next year '20. I mean from a timing perspective Yes, but it's less immaterial.