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Simon Property Group (NYSE: SPG)
Q4 2024 Earnings Call
Feb 04, 2025, 5:00 p.m. ET

Simon Property Group Reports Solid Q4 Earnings with Record Results

Key Highlights from the Earnings Call

• Financial Performance Overview
• Detailed Q4 Results
• Future Developments and Strategy

Financial Performance Overview:

Operator

Welcome to the Simon Property Group fourth quarter 2024 earnings conference call. As a reminder, this call is being recorded. I will now introduce your host, Tom Ward. Thank you.

Thomas Ward — Senior Vice President, Investor Relations

Thank you, Matt, and thank you to everyone for joining us this evening. Along with me today are: David Simon, our Chairman and CEO; Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Accounting Officer. I want to remind everyone that the statements made during this call may be forward-looking and actual results could differ due to various risks and uncertainties. Please refer to our press release and SEC filings for more information regarding those risks.

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[Operator instructions] I am pleased to introduce David Simon.

Q4 Performance Insights from the CEO

David E. Simon — Chairman, President, and Chief Executive Officer

Good evening. I am pleased to report our financial and operational success in the fourth quarter, marking an exceptional year for our company. We achieved record total funds from operations of $4.9 billion, equivalent to $12.99 per share. Our real estate FFO was $4.6 billion or $12.24 per share, reflecting a year-on-year growth of 3.9%.

We distributed over $3 billion to our shareholders in cash dividends this year and have returned approximately $45 billion through dividends since going public. Additionally, we experienced record leasing and retail sales volume, along with strong occupancy gains throughout the year. Recently, we completed the acquisition of a mall and two high-end outlet centers in Italy from Kering.

This acquisition enhances our global portfolio as we continue striving for success. We also proudly opened a fully leased premium outlet in Tulsa, Oklahoma, and executed 16 significant redevelopment projects last year. Opportunities for further development are expanding within our portfolio, and we have fortified our A-rated balance sheet to enable future growth.

I will now pass it over to Brian for a more detailed breakdown of our fourth quarter results and our outlook for 2025.

Comprehensive Overview of Q4 Results

Brian J. McDade — Executive Vice President, Chief Financial Officer

Thank you, David. In the fourth quarter, our real estate FFO was $3.35 per share, up from $3.23 in the same period last year, reflecting a growth of 3.7%. Our operations, both domestic and international, had a robust quarter, contributing an additional $0.18 to our growth.

During this quarter, we sold assets which resulted in a tax benefit that partially offset prior expenses related to our ABG sale, along with some predevelopment costs concerning a joint venture project in California.

Leasing activity remained strong, with over 1,500 leases signed for 6.1 million square feet during Q4. For the entire year, we achieved a record of 5,500 leases covering more than 21 million square feet, with newly negotiated deals accounting for about 25% of the year’s activity.

Our malls and outlet occupancy at the end of Q4 stood at 96.5%, reflecting a 70 basis point increase compared to last year. This represents our highest year-end occupancy in eight years, with Mills occupancy reaching a record 98.8%, an increase of 1%. Average base minimum rent for our malls and outlets rose by 2.5% year on year, while Mills operations saw a 4.3% increase.

Retailer sales per square foot averaged $739 for the year. Elevated revenue growth, coupled with strict expense management, resulted in a 100-basis-point improvement in our industry-leading operating margin. Occupancy cost at year-end remained at 13%. Domestic NOI increased by 4.4% for the quarter and 4.7% for the year.

Portfolio NOI, adjusting for constant currency across our international properties, grew by 4.5% for Q4 and 4.6% for the full year. Our fourth quarter funds from operation amounted to $1.39 billion, or $3.68 per share, slightly down from the prior year’s $1.38 billion or $3.69 per share. This quarter’s results included a $0.20 per share noncash after-tax gain from the merger of JCPenney and SPARC Group.

It’s also important to note that last year’s results included a $0.33 per share gain from the sale of a part of our interest in ABG. Looking ahead, we anticipate launching our first premium outlets in Jakarta, Indonesia, in March and plan to initiate construction on four to five mixed-use projects throughout the year. We expect to finance these developments with over $1.5 billion from our internally generated cash flow after accounting for dividend payments.

Lastly, JCPenney and SPARC Group have combined to create a portfolio of notable retail brands dubbed Catalyst Brands.

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Catalyst Brands Signals Positive Momentum Amid Strategic Refinements

Catalyst Brands is seeing strategic growth following the sale of Reebok and the evaluation of Forever 21. The company aims to leverage its strong balance sheet and synergies from recent transactions to foster EBITDA growth.

Financial Highlights and Strategic Initiatives

Catalyst’s shareholders include influential firms such as Simon, Brookfield, Authentic Brands Group, and Shein. Recently, Catalyst has successfully raised $11 billion through various financing activities in 2024, which included the issuance of $1 billion in senior notes with a 10-year term at a 4.75% interest rate. Additionally, the company recast its $3.5 billion revolving credit facility, extending its maturity to January 2030 without adjustments to pricing or terms. Over $6 billion was allocated toward refinancing secured loans, resulting in a notable reduction of approximately $1.5 billion in net debt, closing the year at a net debt to EBITDA ratio of 5.2 times.

The well-capitalized balance sheet provides Catalyst with over $10 billion of liquidity as of year-end, fundamentally positioning it for future growth. The company has also announced a quarterly dividend of $2.10 per share, reflecting a 7.7% year-over-year increase, payable on March 31st.

Guidance for 2025

Looking ahead to 2025, Catalyst projects its real estate funds from operations (FFO) to range between $12.40 and $12.65 per share. This guidance is based on several assumptions: domestic property net operating income (NOI) growth of at least 3%; an increase in net interest expense of $0.25 to $0.30 per share due to current market interest rates; and an estimated diluted share count of about 377 million shares. Notably, due to the recent Catalyst Brands transaction, specific guidance for Catalyst will not be included at this time.

Despite these changes, significant savings and synergies are anticipated from the recent combination. Expectations for positive EBITDA and breakeven FFO by fiscal 2025 have been communicated as the company integrates its operations.

Q&A Session with Analysts

Operator:

Thank you. We will now open the floor to questions. Please hold while we collect inquiries. Our first question comes from Jeff Spector of Bank of America.

Jeffrey Spector — Analyst:

Thank you. I’d like to discuss the initiatives aimed at increasing foot traffic to the malls. Can you elaborate on your programs, such as Tomorrow’s Stars and Meet Me @themall? How effective were these initiatives during the holiday season?

David E. Simon — Chairman, President, and CEO:

We’re pioneers in engaging shoppers. Our national advertising campaign emphasizes the enjoyment of visiting the mall, reminiscent of the vibrant atmosphere of the ’80s and ’90s. The response has been overwhelmingly positive. We are rebranding Simon Premium Outlets to ShopSimon and developing a new loyalty program while hosting thousands of events throughout the year, from breast cancer awareness to Easter celebrations. These efforts leverage digital strategies and are designed to create an exciting shopping experience. We’re confident that our investments will yield a strong return.

Jeffrey Spector:

Thank you.

Operator:

The next question comes from Steve Sakwa from Evercore ISI. Please proceed.

Steve Sakwa — Analyst:

Good evening. Congratulations on a strong year with 21 million square feet leased and improved occupancy rates. How are discussions with retailers evolving, and what insights can you provide regarding pricing power in the current market?

David E. Simon — Chairman, President, and CEO:

Addressing the 3% NOI growth projection, we typically start with conservative estimates, often budgeting for flat sales. However, our retail partners continue to perform strongly, driving additional revenue and boosting our NOI growth. While I refrain from using the term “pricing power,” we maintain strong relationships with our retailers, allowing us to attract new businesses and replace underperforming tenants. Approximately 25% of our leases this year were new, indicating a robust market engagement that drives rent growth. We’re still aspiring to reach occupancy rates like the 97.1% level achieved in 2014, reflecting our ongoing commitment to improvement.

Operator:

The next question comes from Michael Goldsmith from UBS. Please go ahead.

Michael Goldsmith — Analyst:

Good evening. Building on the previous question, can you elaborate on the decrease in NOI expectations from 4% to 3% this year? What are we missing in this projection?

Analyzing Retail Insights: Key Developments Affecting Financial Projections

Understanding Future Retail Sales and Occupancy Factors

In recent discussions, Michael Goldsmith raised an important point regarding retail sales versus occupancy expectations. He inquired about the potential upside related to occupancy and whether factors such as tenant bankruptcies were being factored into the projected 100 basis points. Brian J. McDade, the Executive Vice President and Chief Financial Officer, addressed this by explaining that the company has consistently projected a baseline growth of at least 3% each year, echoing past trends.

McDade noted that the projections for 2025 also account for bad debt based on historical data. While 2024 saw slightly better performance, expectations for 2025 maintain a cautious outlook, reflecting the usual practice in financial forecasts.

The Impact of Tariffs on Retail Operations

Nick Joseph then brought up concerns regarding the fluid situation with tariffs. David E. Simon, the Chairman and CEO, offered insights into how this situation is perceived by retailers. For example, he mentioned that Catalyst sources only 20% of their goods from China. As conversations with various retailers suggest, many are adept at navigating these changes, with plans to pass on some costs to consumers while also seeking tighter control over production costs.

Retailers have notably shifted production away from China in recent years, which has mitigated some immediate impacts. A major concern, however, lies with the de minimis rule, which allows shipments valued under $800 to bypass tariffs. If Congress addresses this issue, it could significantly enhance the competitive landscape for U.S. retailers, leveling the playing field against international vendors who exploit this exemption.

Examining the Recent Acquisition in Italy

Floris Van Dijkum probed further about the recent acquisition in Italy, especially the implications of Kering entering the Top 10 list of tenants. Simon emphasized the strategic selection involved in this acquisition, underlining that it aligns with their focus on high-quality assets at favorable prices. While specific financial figures are confidential, Simon expressed confidence that this venture would enhance net asset value (NAV) and earnings.

The decision to invest in Italy not only follows a robust strategy but also capitalizes on a region experiencing economic growth and development, making it a promising opportunity for the company.

Investment Strategy for B Malls in 2025 and Beyond

Addressing a question from Greg McGinniss, Simon elaborated on the company’s focus on investments in “B” malls, outlining the different types of upgrades and renovations planned. Investments will include enhancing the mall’s aesthetic appeal, adding dining options, and attracting notable retailers. While specific ROI figures vary, projects like the Primark addition in Eastern Long Island are expected to yield attractive returns, projected at around 12%.

This strategic shift towards B malls reflects a broader trend in understanding community needs and adapting to changing consumer habits. Simon noted the importance of these assets within their respective communities, hinting at a future where they will play a crucial role in the overall success of their portfolio.

Simon Property Group’s Positive Outlook and Strategic Growth Plans

In the upcoming years, Simon Property Group (SPG) is set to revitalize several assets as the company shifts focus back to reenergizing its portfolio, thanks to its prior progress on larger properties. A lengthy list of projects is underway, but one property stands out at the moment, as noted by CEO David E. Simon during a recent call with analysts.

Investor Outlook for 2025

Simon announced a promising guidance for 2025, indicating a strong performance against expectations, despite the challenges posed by rising interest expenses. Alexander Goldfarb of Piper Sandler sought to clarify whether this growth reflects a return to Simon’s pre-pandemic success or if it was more about removing operational drag. He questioned whether this boost results from the activation of previously signed leases or a genuine acceleration in the company’s portfolio growth.

“The guidance of $12.40 to $12.65 excludes Catalyst,” Simon explained. While other investments are minor, Catalyst remains an important factor. “We’re looking at portfolio growth of at least 3%, which we hope to surpass,” he added. Key drivers include focused leasing, operational margins, and events through Simon Brand Ventures, along with improvements in retail spaces. This approach has led to a consistent 4% growth rate, despite guiding for only 3%.

“We are being strategic and prudent,” Simon concluded, emphasizing that lease agreements remain a priority. He reassured investors of a positive trajectory, stating that Catalyst’s financials will provide clarity as the year unfolds.

Leasing Trends and Strategic Renewal

Addressing inquiry from BMO Capital Markets’ Juan Sanabria, it was highlighted that about 5% of SPG’s leases are still on a month-to-month basis, slightly above pre-COVID levels. Brian J. McDade, CFO, responded, noting that the month-to-month leases are a result of ongoing renewals and that they expect this percentage to decrease over time.

“We are ahead on renewals compared to last year, and we have significant commitments,” Simon added, expressing his commitment to optimizing lease signings.

Planned Mixed-Use Developments

Analyst Vince Tibone inquired about the company’s mixed-use projects expected to break ground in 2025. David E. Simon indicated that the anticipated investment could range from $400 million to $500 million. These developments, primarily in joint ventures, will encompass various property types including residential, hospitality, and office spaces. Notable projects include a hotel at Roosevelt Field and a significant residential development in Brea.

Simon noted his apprehension regarding rising construction costs in California but expressed optimism about expanding the company’s pipeline. Currently, he confirmed that Simon typically engages in 50-50 partnerships for its nonretail projects.

As Simon Property Group moves ahead, its focus remains on prudent growth and strategic partnerships, while maintaining a positive outlook for the coming years.

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Simon Property Group Discusses Future Investments and Market Dynamics

Analyst Overview by Vince Tibone – Green Street Advisors

Thank you.

Operator

Next, we have Mike Mueller from J.P. Morgan. Please proceed.

Mike Mueller – Analyst

Hi there, I understand you can’t discuss Kering’s pricing directly. However, could you share your thoughts on how pricing for a similar quality U.S. asset could compare today? Would it be stronger, weaker, or on par?

David E. Simon – Chairman, President, and Chief Executive Officer

I didn’t quite catch that. Could you please rephrase your question?

Mike Mueller – Analyst

Of course! Referring to the purchase in Italy, I understand the limitations around discussing metrics. Hypothetically, if you compared it to a U.S. asset of similar quality, how do you think the pricing would measure up? Would it have a higher or lower cap rate?

David E. Simon – Chairman, President, and Chief Executive Officer

Great question. On a broader scale, properties like these in Italy typically have higher cap rates compared to similar properties in the U.S. That’s a key factor in our decision-making process. How’s that?

Mike Mueller – Analyst

That’s helpful. Thank you.

Operator

Next is Caitlin Burrows from Goldman Sachs. Please go ahead.

Caitlin Burrows – Goldman Sachs – Analyst

Hello, everyone. I wanted to touch on acquisitions and capital allocation. It seems you’ve been eyeing the Kering acquisition for some time. Are there any other attractive acquisitions you’re considering and how do you balance that with stock buybacks, redevelopment, and dividends?

David E. Simon – Chairman, President, and Chief Executive Officer

Yes, Caitlin, there isn’t a major deal on the table currently. We’re focused on several high-quality transactions and while there are no guarantees, we remain optimistic. Right now, I’m thinking we can manage a diversified approach, incorporating all these strategies.

We’ve reduced debt levels and are looking at valuable transactions without drastically affecting our financial stability. You can think of development and redevelopment projects as long-term commitments. For instance, our new Nashville project has significant potential due to its location and accessibility. While we are also active in Asia, new developments in Europe are limited, and we’re exploring enhancements in places like Woodbury and Toronto Premium Outlets.

Things might change, but the plan is to maintain a balanced strategy for the time being.

Caitlin Burrows – Goldman Sachs – Analyst

Sounds like an exciting mix of opportunities. Thank you.

Operator

Our next question is from Haendel St. Juste from Mizuho. Please proceed.

Haendel St. Juste – Analyst

Good evening, David. I wanted to revisit your strategy regarding investing in your B assets. How do you achieve those 12% returns compared to the 8% to 9% we’ve seen in your A properties?

Is this due to a lower rent base, or stronger demand for space in those B malls? Is 12% reflective of typical returns for these investments?

David E. Simon – Chairman, President, and Chief Executive Officer

The primary factor here is that we often start with little to no existing income from these spaces. When we calculate returns, we remove any existing income, which can significantly boost the apparent return on investment. Many of these properties start off as empty, which contributes to the 12% return, but not every case will hit that mark.

Haendel St. Juste – Analyst

Got it. Does that 12% return represent an incremental risk return for these assets?

David E. Simon – Chairman, President, and Chief Executive Officer

That’s an insightful question. However, I view the returns not just in terms of risk but rather the inherent value of the assets. We aim to make investments that enhance asset value. If we can’t create NAV-accretive opportunities, we might opt to manage cash flow instead. It’s essential that we’re confident in the asset’s potential before making investments.

Haendel St. Juste – Analyst

Thank you for the clarification.

David E. Simon – Chairman, President, and Chief Executive Officer

Thank you.

Operator

Next, we have Linda Tsai from Jefferies. Please go ahead.

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Simon Property Group Discusses Domestic Opportunities and Consumer Trends

Analyst Questions on Local vs. Overseas Prospects

Linda Tsai — Analyst

Yes, hi. After Kering, do you see more opportunities for growth abroad or domestically?

David E. Simon — Chairman, President, and Chief Executive Officer

I would say mostly domestic because it needs to be extremely unique, similar to what we observed with the mall, which is rare. I believe I spoke about this a couple of years before COVID. There aren’t many standout properties in Europe that fit our business model. To clarify, we’re not going to acquire a mall in Europe just to have property there.

Regarding the outlet business, our view is slightly different. Therefore, because it needs to be unique, I would say we are focusing more on domestic opportunities.

Consumer Behavior Insights Across Regions

Linda Tsai — Analyst

Thanks. How do you view current consumer behavior—specifically, comparing the high-end and low-end markets in the U.S. versus Europe?

David E. Simon — Chairman, President, and Chief Executive Officer

In Europe, consumers are quite cautious. On the other hand, I have some concerns about the lower-end U.S. consumer segment, though I feel optimistic about upper-income consumers. There are numerous fluctuations affecting the market, making it difficult to forecast accurately. Overall, I remain concerned about lower-end consumers but am confident about the higher-end segment.

Performance of Outlets vs. Malls and Dollar Strength Effects

Operator

Next, we have Ronald Kamdem from Morgan Stanley. Please proceed.

Ronald Kamdem — Morgan Stanley — Analyst

Hi, thanks. Reflecting on last year’s strong performance, can you differentiate between the outlets and mall businesses? What were the key drivers of this performance? Was it the traffic, price increases, etc.? Also, how is the strong dollar impacting tourist centers?

Brian J. McDade — Executive Vice President, Chief Financial Officer

Hi Ron, it’s Brian. There wasn’t a significant division in performance among our asset types. All three platforms excelled. The outlet center at The Mills, which tends to cater to more value-conscious shoppers, performed particularly well in the fourth quarter. This wasn’t unexpected; it was just part of our projected performance. We haven’t seen any major immediate effects on tourist centers from the strong dollar yet, but it’s still early in the year, and we do anticipate some effects if the dollar remains strong.

David E. Simon — Chairman, President, and Chief Executive Officer

It’s important to remember that when we discuss revitalizing our assets, we’re not focused solely on malls. We are considering outlets and select Mills in our entire domestic portfolio.

Closing Remarks

Operator

This wraps up our question-and-answer session. Now, I’ll turn the floor back to David Simon for any closing remarks.

David E. Simon — Chairman, President, and Chief Executive Officer

Thank you all, and I look forward to our next conversation. Appreciate your time.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Thomas Ward — Senior Vice President, Investor Relations

David E. Simon — Chairman, President, and Chief Executive Officer

Brian J. McDade — Executive Vice President, Chief Financial Officer

Jeffrey Spector — Analyst

Steve Sakwa — Analyst

Michael Goldsmith — Analyst

Nick Joseph — Analyst

Floris Van Dijkum — Analyst

Greg McGinniss — Analyst

Alexander Goldfarb — Analyst

Juan C. Sanabria — Analyst

Vince Tibone — Green Street Advisors — Analyst

Mike Mueller — Analyst

Caitlin Burrows — Goldman Sachs — Analyst

Haendel St. Juste — Analyst

Linda Tsai — Analyst

Ronald Kamdem — Morgan Stanley — Analyst

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