Simon Property Group, Inc. (NYSE:SPG) Q1 2024 Earnings Call Transcript

Simon Property Group, Inc. (NYSE:SPG) Q1 2024 Earnings Call Transcript May 6, 2024

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

Operator: Greetings and welcome to the Simon Property Group First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Ward, Senior Vice President of Investor Relations. Thank you, Mr. Ward, you may begin.

Tom Ward: Thank you, Camilla, and thank you all for joining us this evening. Presenting on today’s call are David Simon, Chairman, Chief Executive Officer, and President; Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Accounting Officer. A quick reminder that statements made during this call maybe deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today’s press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today’s date.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today’s Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call this evening will be limited to one hour. For those who would like to participate in the question-and-answer session, we ask you please respect our request to limit yourself to one question. I’m pleased to introduce David Simon.

David Simon: Good evening. We’re off to a good start with results that exceeded our plan. First quarter funds from operation were $1.33 billion or $3.56 per share compared to $1.03 billion or $2.74 per share last year. Let me walk you through some highlights for this quarter compared to Q1 of ’23. Domestic operations had a very good quarter and contributed $0.09 of growth, driven by higher rental income. Gains from investment activity in the first quarter were approximately $0.75 higher year-over-year. OPI had a $0.02 after tax lower contribution compared to last year. Funds from operation from our Real Estate business was $2.91 per share in the first quarter compared to $2.82 in the prior year period, 3.2% growth rate. Domestic property NOI increased 3.7% year-over-year.

We have continued leasing momentum, resilient consumer spending, and operational excellence delivered these results that were above our plan for the first quarter. Portfolio NOI, which includes our international properties at constant currency grew 3.9% for the quarter. NOI from OPI in the first quarter includes a $33 million charge in one-time restructuring charges at SPARC and J.C. Penney, excluding these one-time charges and a bargain purchase gain from Reebok transaction last year, NOI from OPI improved $5 million year-over-year and was on plan for the quarter. Remember, these retailers are on a fiscal year end of January 31st and the charges were part of their year-end closing process. They were not budgeted. Mall and occupancy at the end of the first quarter was 95.5%, an increase of 110 basis points compared to the prior year.

Mills was 97.7%. Average base minimum rent for our malls and outlets increased 3% year-over-year and at the Mills 3.8% increase. Leasing momentum continued, as I mentioned, we signed more than 1,300 leases for approximately 6.3 million square feet. Approximately 25% of our leasing activity in the first quarter was new deal volume. We are approximately 65% complete with our ’24 lease expirations and we continue to see strong broad-based demand from the retail community. Retail sales volume across the portfolio increased 2.3% for the first quarter compared to last year. Our tourist-oriented properties outperformed the portfolio average in the quarter with a 6% increase in sales. Reported retail sales per square foot in the first quarter was $745 a foot for our outlets and malls combined, which was flat year-over-year, excluding two retailers.

Retail sales per square foot from our premium outlet platform reached an all-time high this quarter. Occupancy cost at the end of the first quarter was 12.6%. Now let me talk about other platform investments affectionately known as OPI. We sold our remaining interest in Authentic Brands Group during the first quarter for gross proceeds of close to $1.2 billion and recorded a pre-tax and after-tax gain of $415 million and $311 million, respectively. The sale in the first quarter combined with the sale in the fourth quarter yielded gross proceeds of $1.45 billion. We generated substantial value from the ABG investment and a 7x multiple on our net invested capital during our short ownership period. As a result of the sale of ABG and the restructuring charges that I mentioned earlier, one-time in nature at SPARC and Penny in the first quarter, we now expect FFO contribution from OPI to be around breakeven this year compared to the initial guidance of $0.10 to $0.15.

For your reference, we budgeted the — at OPI, the FFO from ABG around $0.08 per share, so roughly half of that was associated with ABG. Now moving on to new development and redevelopment, we opened an AC Hotel at St. Johns Center. We are opening Tulsa Premium outlets this summer, leasing is going great, and we have a significant expansion at Busan Premium outlets in South Korea this fall. At the end of the quarter, new development and redevelopment projects were underway across our platforms in the US and Internationally as well with our share of net cost of $930 million at a blended yield of 8%. We expect to start construction on additional projects in the next few months, including just shortly our residential project at Northgate Station in Seattle.

What’s interesting for us is we’re able to build when others need to rely on construction lending market, which is, as you might imagine very difficult right now. We expect our starts to be around $500 million this year now. On our balance sheet, we retired $600 million of senior notes in the quarter. We ended the quarter with approximately $11.2 billion of liquidity. Today, we announced our dividend of $2 per share for the second quarter, a year-over-year increase of 8.1%. The dividend is payable on June 28 and given the transactions for this quarter and our results for this quarter, our current view for the remainder of the year, we’re increasing the full range of our full year guidance of 2024 in the guidance range of $11.85 to, I’m sorry, let me restate that, we’re increasing our range to $12.75 to $12.90 per share compared to $12.51 last year.

This is an increase of $0.90 at the bottom end of the range and $0.85 at the midpoint. Needless to say, I’m very pleased with our first quarter results and our business and tenant demand continues to remain strong despite a cloudy macro-environment. Occupancy is increasing. Property NOI is growing. We made a significant profit on our ABG investment and everything is kind of moving in all the right directions. Thank you. We’re ready for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Caitlin Burrows: Hi. Good evening, everyone. Congrats on the solid quarter operationally and execution on the ABG sale. I guess there have been news reports that you could get involved in Express, so whether it’s related to Express or the Simon’s strategy going forward, can you give some insight to your current thinking on having ownership in Brands, what type of terms are attractive to you and how you balance that with the potential earnings volatility?

David Simon: Well, no one likes earnings volatility unless it’s volatility in the right direction, okay. So, Caitlin, thank you for the comments to start, but that’s — I don’t like volatility either. Listen, on Express, we were approached by the IP owner. I think it’s not overly complicated in the sense that they saw, what we had done historically both with ABG and SPARC and offered us to participate with no capital, but also add our expertise and our knowledge in what we’ve been — what we’ve done in the past with SPARC and because we have always valued Express as a retailer and as a client, we jumped at the — at the opportunity. So we don’t expect it — we expect to be — it’s got to go through bankruptcy process and that’s out of our control, but if WHP does end up getting it, we’d be pleased to participate in the turnaround of Express.

And again we don’t expect any capital as part of that participation. So when we get opportunities like that, we evaluate it, we look at the brand and the value of the brand, in this case, we’re comfortable that Express is a good company and is a great brand and we can add value to it, and given the fact that we’re able to hopefully turn around the retailer, save jobs, create the value from our investment, it’s — we see it as a win-win situation with no capital from our standpoint.

Caitlin Burrows: Great. Thanks for that.

David Simon: Thank you.

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

Lizzy Doykan: Hi. This is Lizzy Doykan on for Jeff. I was curious if you could talk a little bit more about the key drivers of retailer sales as we started the year and it seems like there’s been some good outperformance from — driven by especially your tourism-driven centers. So I’m just wondering how much that has been a factor into the first quarter of this year and how much upside there is remaining from tourism? Thanks.

David Simon: Sure. We feel very bullish on our portfolio in general and then obviously our tourist centers, especially in California and in the Northeast, are starting to finally see the improvement that we have been seeing for quite some time in Florida. And Florida continues to be an unbelievably strong market as well. So we’re finally seeing California, Northeast pick up. Obviously, the strong dollar vis-a-vis certain currencies does have a — an effect, kind of an inhibitor effect, but even with that said, domestic tourism continues to excel, and I think people, at the end of the day as part of when they go on holiday, they love — they love shopping as part of that experience, dining, shopping, being with their families, and as I said earlier, I mean, we feel like the malls made a big comeback, physical stores or where it’s happening, we’re seeing a resurgence and reinvigoration of that whole product.

So we’re pleased is kind of where we’re seeing things. So certainly the lower-income consumer has been under pressure now for quite some time. We’re very focused on that. Obviously, inflation has taken its toll and even though inflation is moderating, the prices that the lower income consumers dealing with are quite daunting. So we’ll continue to see volatility in that area we anticipate. We’re hoping that their cost of living moderates and to some extent their wages go up or their cost of living goes down, so we can see more discretionary income there. The higher income consumer continues to spend and visits our properties and it’s good. And as a good example of that is our traffic for the first quarter, I think, was up around 2% for the year, right, guys?

Brian McDade: Yes.

David Simon: So that’s also a very good sign, okay.

Operator: And our next question comes from the line of Samir Khanal with Evercore. Please proceed with your question.

Samir Khanal: Good afternoon, everyone. David, Brian, you provided a same-store guide of at least 3% last quarter. I guess how do you feel about that guide today? You’re doing 3.7% in the first quarter. Clearly, leasing has been strong, but we’ve also seen some announcements from Express rue21. I guess, how do you feel about that guide today? Thanks.

David Simon: Yeah, look, we don’t — we don’t update that as you probably know, I think you know, we don’t — that’s our goal for the year. We don’t update it every quarter as some others might, but we still feel like that’s even though we’ve got some unanticipated to some extent, I mean, we do create bogeys on our rental income stream on retailers that we do feel might come under pressure in the air, so we do have kind of adjustments in our budgeting process dealing with those. We still feel like our initial guidance on that is very achievable. So we don’t update it every quarter, but if we didn’t feel like we could achieve it and I think we would highlight that, but we don’t see that even with some of the, I mean, we might not overachieve as we always want to but I think we can still deliver the initial guidance.

Samir Khanal: Thank you, David.

David Simon: Thank you.

Operator: And our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Ronald Kamdem: Great. Just a quick one on the $500 million development starts. If you could just talk about sort of the opportunities there? And do you sort of still see opportunities to go on offense on sort of the mall space given that fundamentals are coming back and we know that there’s going to be peers looking to sell assets, are there opportunities and appetite to go on offense on sort of buying more assets? Thanks.