Simon Property Group Q2 2024 Earnings Call Transcript

Thank you, Jeff.

Sure, Jeff. This is David. I'll take that. So look, I think we've been pretty consistent for well over a year that the lower-income consumer has been under pressure for quite some time, primarily because of the inflation that's affected them. So that continues to be the case, they are very focused on managing their bills and discretionary expenditures have been obviously not where we'd like to see them. So we're optimistic that we're going to cycle out of that from the lower-end consumer as given the inflation picture that we see now, which is relatively benign. It's way too early, Jeff. We haven't seen a slowdown in the higher-end consumer.

Obviously, the market is in an interesting point. We have not seen the wealth impact at all impact that higher-end consumer. So we're still pretty sanguine about it. I think, as you know, we kind of budgeted at the beginning of the year flat sales. We're a little bit above that. So we've got a little bit of cushion. But the higher-end or the better end-consumer, I think is in a good spot. Your liquidity is in a decent spot. So we don't expect anything dramatic. But obviously, they're going to take their cue from now what's going to happen in the overall market and what the employment picture looks like. So in summary, I think we're going to cycle more positive in the lower-end consumer and I think the higher-end consumer steady as it goes currently. Yeah, Jeff, you can always ask another question, but Tom Ward has put a pretty tough restriction on people.

Thanks, Jeff.

Yeah, I don't have color on July. We don't really get those numbers until August 20th, which is my birthday by the way, but it's usually 20 days after the month so no early returns on that. So we had a deal committee meeting, Brian, a week ago and what I am told that I don't participate in these because I would probably be disruptive, but what I am told, it was the best new deal committee in we've had ever. So I think what we're seeing is demand and what I said earlier in my opening remarks, demand is strong and steady, not abating. It's really unabated. Obviously, retailers and so we're all sensitive to economic conditions. So as those develop, we have to be sensitive to them. But as we currently speak, we had a great deal committee and the team is working in all cylinders. So that's kind of the news from the front.

Sure.

Hey, Caitlin, it is Brian. I think we're pretty comfortable thinking that we're going to end the year north of 96%. Certainly still a little bit of noise out there, but given the robust demand in the type of environment we're in, we think we're north of 96% by the end of the year.

I'm sorry, I was just going to add that I think obviously, it's also not just the occupancy number, it's also replacing retailers that aren't performing with better retailers. So it's a mix issue too, which the team is very much focused on. Go ahead, Caitlin.

Well, I'd be cautious and that's a pretty good number for us year-end. Tom knows every number, but he's function [Indecipherable] So it's a pretty good increase from last year, 95.5%. Not that good at that. So maybe there's upside.

Yeah. Thanks.

Well, thank you, Alex, for the thoughts. And let me just answer your question. So I frankly think that listen, it sounds like I'm, talking our book, which obviously you would expect us to do, but we have never been better-positioned. So if we do -- so I don't look at the -- that the current uncertainty and even a potential recession no one wants to go through that but given how we're positioned I think we're in an absolute unequivocal position to improve and better our company.

So again, we don't want to go through recession, but if we do, the gap between us and everybody else just gets bigger and bigger. Our gap, if you look at kind of where we started three years ago and where we are today, the gap is pretty damn big, it will only get bigger and that's a testament to the team and everybody else. So -- and honestly, I'm not looking at a current potential recession or tough market as any basis to slow down. I look at an example, we just started construction in Northgate, building 234 projects. And we expect to do another phase of that probably in the next nine months as we go through the pricing. So from our standpoint, we're not slowing down. And if the economy slows dramatically, the gap between us and just about everybody else will only get bigger and that's -- that gives us opportunities to do some interesting projects...

I think the better retailers that are -- we have a number of retailers that are in really good financial standing and I think they take a longer view just like we do. Not everyone, but I would tell you the majority of who we're doing new business with is definitely taking a longer-term view. So they're looking to gain sales and market share as well. So we're certainly not on the defensive into the kind of the turmoil over the last few weeks. And if anything, we'll step up our investment activity, but not foolishly. I mean, we'll do it like we do everything else, but we don't see it as a reason to rain in at this point.

Sure.

Well, again, occupancy is like any statistic people want. And again, to be clear, we do think we'll increase our occupancy. The bigger opportunity for us is again to continue to increase better than mix. So -- and that drives, obviously the better the mix, the higher the sales, the higher the sales, the more likelihood that you're going to have higher rents. So that's the big focus as we continue to merchandise our properties. Brian, I don't know if you want to add anything to here.

Yeah, Michael. Look, we continue to see pricing power. Roughly rents are similar where we've seen an escalation last year that we talked about rents in the 70s for new deals. That's continuing. And as we find more-and-more retailers and update the mix to drive demand and ultimately drives our pricing power. So there's a recurring premier relative to that.

Craig, it's Brian. Look, one day doesn't really change our financing plans for the year. We're sitting on $3.1 billion of cash. We had $1.9 billion in maturities in the back-half of the year. Current plan is still to refinance those out with cash on hand. But to the extent we were to see opportunity to do alternatively or the market opened up with tight spreads, certainly, we could access the market in the back half of the year as well. But no current plans to do so at present.

Yeah. And I would just say, look, we got $11 billion of liquidity, so obviously a lower interest-rate environment does increase our earnings potential. There's all sorts of things associated with a lower interest-rate environment, but by and large, that's beneficial to real estate. So if that's the case, that's going to be better than what we planned initially for this year and what we were thinking for next year. So that's good news in a nutshell. But again, remember, we got -- we're not living, mortgage to mortgage, we're a different kind of company. So we don't have the Holy Toledo, I'm going to say another word, Holy Toledo, we can't refinance this mortgage. So anyway, so -- but by and large, if rates go lower, that's better for this company.

Well, it's a good question and that's when I would just say judgment comes into play. I mean we have been as you know, right, because if there was any material, we disclose it. We haven't really done anything external for quite some time and we're going to just be looking at quality stuff where we can add value that's appropriately priced. And up until this point, frankly, we haven't found it. So that doesn't mean that we're discouraged, but we'll keep doing that because that is an element of what this company is good at. And we would like to add quality where we could add value at the right price and if it's not at the right price or if it's not at the right quality, there's just nothing there for us to do. We're not -- we're basically out-of-the portfolio business. So that as far as I can see, I mean things change, but I just don't see us buying another big portfolio that where we'd have to swap off a handful of properties. So we're really going to be selective and -- but again, it's going to be at the right price. And if we can't get it at the right price, then we've got plenty to do and that will keep our liquidity and keep doing what we're doing.

Sure.

Well, Ron, I think you're seeing broad-based demand across all of our platforms. So it's difficult to kind of give you an individual kind of thumbnail into it. But certainly, we see -- we over-index in our outlet business, certainly towards international towards and that's still very strong for us. That's a driving factor kind of in our outlet business results. But certainly, the retailers are doing business across all three formats. You're going to say the highest occupancy ever. So the demand is broad-based from all retailers across all three major platforms of ours at this point. David, I don't know if you want to add anything?

Yeah. It's kind of interesting. I just don't think there's like a unique trend, so it's not Florida or Texas, it's not outlets room halls, it's not enclosed versus outdoors, it's really very property-specific and I would say that the quality and the good stuff is getting better and it's almost our traffic which is a good indicator was pretty much across the board. So I think there's no unique -- unlike COVID where when you came out of COVID, it was Florida and Texas kind of the smile states and whatever, I think it's really the -- it's really property-specific. And it's not -- so you could have a great property in X, Y, Z city and a not-so-good one in X, Y, Z city and they're a tale of the two stories. So I really think the -- I really think it's property-specific. And I don't think there's any one particular trend to focus on at least in this quarter. You might have a better sense of it by year-end and see how things shake out, but not right now.

Sure.

Hey, Haendel, it's Brian. As we think about demand, we've got a signed but not open pipeline of about 300 basis-points. You heard David talk about mix and so we are moving some tenants around. So that's not all just additive. There'll be some coming out-of-the bottom of that for sure. But that's just a further indication of the work that our team has done in demand for space to have 300 basis points signed, but not open pipeline for us. So really, really kind of that defines or kind of really gives you a really good sense of the breadth of what's out there for us as far as demand for space,

As you know, we don't update that as we go. We established it at the beginning of the year, and to see that our best to exceed that number which we have thus far.

I think it's more -- that's a -- I wish I had an algorithm. I don't, but I'm sure we could get AI to do something for us. I would -- my history would suggest short-term fluctuations mean absolutely nothing. But over time, if you had a down-market for six or nine months, you're going to rein in consumer spending. So I do think it's going to have to take the downward trend or the negative -- the volatility is not going to really impact the consumer in the next short period of time. But if you see it for several months, then I would expect us to see some slowdown in consumer spending.

So definitely it does take time to see, but I think that the consumer is used to seeing some volatility and they have some probably built-in gains that they never thought they would have had, right? So when companies get valued in trillions -- I remember when a $50 billion market cap was did, when companies get valued at trillions of dollars, and that's a lot of retail, I hope those retail investors are smart enough to sell and then spend the money in our malls, I mean that would be a good cycle for us, okay? So I think even if these levels were in pretty good shape, if you have a -- if you have kind of a longer downturn, then it's realistic to think that consumer spending is going to be reined in. But offsetting that obviously will be, low inflation, lower interest rates and you can -- you could potentially see a scenario that we dealt with pre-COVID, right? So it's -- if there's a lot of variabilities out there in advance. And -- but I don't think short-term fluctuation is going to have an immediate impact.

Yeah. Look, I'll -- Brian may have a number. I would just say big-picture, a lot less coming out of COVID, but higher probably than pre-COVID. And so I don't know what [Indecipherable] that is, Brian, if you don't, well, we could probably give that number to you. But it's certainly a lot less than when we started in COVID, but higher than probably pre-COVID.

We'll follow-up offline, Vince.

Thank you.

How old are you going to be?

No, no, no, not at all.

Greg, from an international perspective, Greg, last year, we did recognize a one-time performance fee in our [Indecipherable] business to some third-party managed capital there. So that did not repeat this year. So that's why you see a decline in that line item. That will normalize itself just by sheer operation going forward.

Yeah. I would just say our international assets both in Asia and in Europe are pretty much on plan if not a little bit better. So Klepierre, as you know, reported last week to better results. And they're obviously nicely positioned going forward. And Europe and Asia, there is some movements in the different countries, Japan having extraordinary growth because of the yuan, a couple of other markets flat. But generally speaking, international -- this got good -- as Brian mentioned, good comp NOI growth this year and pretty much on budget.

Sure.

Well, let me -- thank you. Let me try to unpack that a little bit, okay? So, for us, let me -- I would say, first of all, L Catterton has been very smart investors and Value Retail is a unique structure. So I don't think you can look through their investment that was at a significant discount to NAV to get to a cap rate without really having intimate inside knowledge which you and I don't have, okay? But they're very smart investors and I don't think this is a -- so that's the first point I'd like to make just on that question.

Second is I think, again, it depends on what brands you're talking about, whether it's luxury or higher-end or whatever, a better moderate. Every retailer is different, everyone's looking to increase their sales and every brand is different. So it's you cannot paint a luxury investor by one broad stroke. So and even within some of the larger groups, their brands are different. You may have one brand growing, one shrinking, what have you? I don't expect, and again L Catterton is also owned by the principals of Catterton so it's not just the group. So I don't think there is a trend for them to suddenly invest, got some money in retail real estate, but I could be wrong. And I think it really depends on each brand and what their strategy is.

Well, I would say overall, we hope that our relationships with our institutional partners is excellent. And again, it's -- there is very hard to paint a broad brush. I would say by and large, most are very complementary, very happy to be our partner. There's always an asset here or there that may not fit with them long-term, but I would say generally, it's kind of business as usual with our institutional investors.

Sure.

Linda, most of that's going to be back-end weighted to -- there'll be a little bit this year. Most of it will really manifest itself next year just given where we are in the year and how retailers traditionally position their store fleet to get most of it open before we're back-to-school holidays. So most of it is going to be back-end weighted for next year -- front-end weighted for next year, excuse me.

It's really difficult to predict what's going to happen 12 months from now. So it is what it is right now. Ultimately, as we continue to kind of move through, we've seen some consistency in that number and some increase, right? We were talking about it is about 200 basis points a year-ago. So we would see an increase over the past 12 months to get to 300 basis points but then.

I don't have that number in front of me here.

Yeah, that's usually not something that weren't. That's something we're not going to really disclose because then you add all leases up and annualize the number, but it's a big number.

Thank you.

It's just a mix of the deals that they're doing at the assets they're doing, Michael. So they're doing some better leasing at their better assets and that's really coming through the average rents for that period of time. Not every space is created equal, not every asset is created equal. So they're seeing great wins at their best assets that have the best pricing. And it's not a small portfolio. So you're getting a bigger percentage. It's a smaller portfolio, a much smaller portfolio than ours. So you're just getting a bigger percentage jump from it.

Yeah, sure. I'll take a shot at it. So I mean historical recessionary times. And again, we're not in that camp just yet. I mean you call me in two months and we might be. But I would say our NOI cash flow tends to flatten out. It's very obviously there's so many variables that go into it, but I hate still talking about COVID, but we really didn't see other recessions, really didn't see cash flow from the properties go down, they flattened. I would think not knowing exactly if and what kind of recession it is and how hard and how deep and all that other stuff. It would be hard to give you a number other than to say history would indicate our cash-flow was relatively flat.

We weathered pretty nicely because what happens is -- tends to happen as big-ticket items tend to go in the back-burner and the stuff that we sell at our properties tends to maintain itself. So that would be the best guess at this point, but it is almost impossible without kind of knowing exactly what kind of market that we're in. But again, we're not in that camp yet. And we might be later on in the year or whenever but I would think our cash flows would be relatively flat assuming it's -- you just -- it's hard to say what a typical recession is anymore, but I would say that's probably the best guess at this point.

Sure.

Well, I'll just say you know in Brian's remarks, we definitely have a decent impact from the retailer restructurings. I mean, also we have a little lower lease owned income, a little lower of land sales than we had budgeted. But if you put those three categories together, it's about $0.15 that we had planned on being there that aren't there this year. So obviously, we factored in the Express restructurings and Rue and so on. So those numbers are reflective of our new guidance. And it doesn't reflect if there's a material new one coming up, but we don't -- we haven't -- we don't know of anyone that's on the road. So, Brian, you can add whatever you want to add.

Yeah, watch list continues to be relatively flat. Those things that have happened, we had a thought that they would and it planned ahead. We don't really see much on the horizon at this point. No new additions in the watch list at this point.

Well, look, I think we continue to work through it. It's -- if you look at that whole, Penney, SPARC, RGG, Jamestown, we basically have around $200 million plus or minus EBITDA in that kind of OPI bucket now that APG is out. And it'll be plus or minus a couple of cents here or there. So because again, we have accounting, we've got lots of depreciation. You don't have that fast and the brands within SPARC, the lower-income consumer continue to fight through a tough market for that consumer. So there's not a lot of new news other than the team at SPARC is working very hard. The new stuff that they're buying is working but it continues to be a very competitive marketplace.

Thank you.

Thank you,

I think this wraps it up. Let me just say to everybody, thank you. I got a lot of well wishes during this tough time for me and I'm working at it and appreciate all your support and we'll talk in the near future. Thank you.