Q2 2024 Earnings Summary
- Strong Financial Position with $11 Billion of Liquidity: SPG has $11 billion of liquidity, allowing them to refinance maturities with cash on hand and take advantage of opportunities. Lower interest rates increase their earnings potential, which is beneficial to real estate. ,
- Robust Leasing Demand and Pipeline: Demand for space is strong and steady, not abating, with a signed but not open pipeline of about 300 basis points. SPG had the best new deal committee meeting ever, indicating strong leasing activity and opportunities to improve tenant mix, which drives higher sales and rents. , ,
- Continued Pricing Power Leading to Rent Growth: SPG continues to see pricing power with rent escalations similar to last year's levels. Updating the tenant mix drives demand and ultimately enhances their pricing power.
- Occupancy levels are approaching a potential ceiling at around 96%, potentially limiting future growth from occupancy gains. Management acknowledges that further increases may be cautious from this point.
- International NOI declined by 1% year-over-year, and JV revenues decreased by about 4%, indicating underperformance in these segments. The decline was partly due to the absence of a one-time performance fee recognized in the previous year, which may not recur.
- Retail brands targeting lower-income consumers, particularly within Spark, continue to face a tough and competitive market, affecting the company's overall retail operations and potentially impacting future earnings.
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Consumer Spending Trends
Q: What's your latest view on the consumer amid recession fears?
A: David Simon noted that the lower-income consumer remains under pressure due to past inflation but is optimistic they'll improve given current benign inflation. The higher-end consumer hasn't slowed down and remains in a good spot with decent liquidity. They budgeted flat sales at the beginning of the year but are currently a little above that, providing some cushion. Overall, he expects the lower-end consumer to cycle more positively and the higher-end consumer to remain steady. -
Leasing Demand and Occupancy
Q: Is leasing demand strong, and can occupancy increase further?
A: Leasing demand is strong and steady, with no signs of abating; they recently had the best new deal committee meeting ever. Occupancy is expected to end the year north of 96%, up from the current 95.6%. While cautious about reaching a ceiling, they see opportunities to improve tenant mix, replacing underperforming retailers with better ones, which can drive higher sales and rents. -
Impact of Economic Concerns
Q: How do economic concerns affect expansion and investments?
A: David Simon feels they have never been better positioned and are not slowing down expansion plans despite potential recession risks. If the economy slows dramatically, the gap between SPG and competitors will only widen, creating opportunities. They just started construction in North Bay and may step up investment activities prudently. Retail partners are also taking a longer-term view and remain confident. -
Interest Rates and Financing
Q: Does the softening rate environment change financing plans?
A: With $11 billion in liquidity, SPG's financing plans remain unchanged despite lower interest rates. They plan to use their $3.1 billion in cash to address $1.9 billion in debt maturities in the back half of the year. Lower interest rates increase earnings potential and are beneficial to real estate, but they don't need to refinance immediately and can act when market conditions are favorable. -
Retailer Bankruptcies Impact
Q: How have 2024 bankruptcies affected financials and outlook?
A: Retail restructurings, including Express and Rue 21, had a decent impact, resulting in about $0.15 per share less than planned due to lower lease income and land sales. These impacts were factored into their new guidance. The watchlist remains relatively flat with no significant new additions anticipated. -
External Acquisitions Strategy
Q: Any plans for external acquisitions given market conditions?
A: SPG has not made significant external acquisitions recently and is focused on quality assets where they can add value at appropriate prices. They remain selective and are not expecting to purchase large portfolios. If they can't find suitable opportunities at the right price, they'll keep their liquidity and focus on existing operations. -
Portfolio Performance in Downturn
Q: How might your portfolio perform in a consumer downturn?
A: Historically, SPG's NOI cash flow tends to flatten rather than decline during recessions. David Simon expects that their cash flows would remain relatively flat, assuming a typical recession scenario, though specific outcomes depend on the severity and nature of any downturn. -
Lease Backlog and Timing
Q: What's the size and timing of your lease backlog?
A: They have a signed but not opened pipeline of about 300 basis points, up from 200 basis points a year ago. Most of these leases will commence next year, as retailers aim to open stores before key periods like back-to-school. The backlog indicates strong demand, but specific dollar amounts were not disclosed. -
Sensitivity to Tenant Sales
Q: How sensitive are cash flows to tenant sales declines?
A: SPG's exposure to tenant sales fluctuations is less than in the past but higher than pre-COVID levels. While overage rents are a smaller portion now, they suggest overall cash flow volatility due to tenant sales changes is reduced. Exact percentages were not provided. -
International and JV Performance
Q: What's affecting international and JV performance this quarter?
A: A one-time performance fee recognized last year did not repeat this year, leading to a slight decline in international NOI. Despite this, international assets in Europe and Asia are performing on plan or better, with good comparable NOI growth and remaining on budget.
Research analysts covering SPGJ.