Q4 2023 Earnings Summary
- Strong leasing demand and favorable supply dynamics: SPG is experiencing robust leasing momentum, with over 4,500 leases signed representing more than 18 million square feet in 2023. Leasing demand remains strong across all categories, while new retail real estate development is minimal, leading to historically low supply and positive rent growth. Occupancy costs are at the low end of historical ranges, suggesting potential for further rent increases.
- Exciting growth initiatives: SPG is investing in mixed-use developments, redeveloping department store spaces, and expanding their outlet business in Southeast Asia. They are also enhancing customer experience through technology and evolving their retailer mix with new and innovative concepts. These initiatives are expected to drive future growth and enhance property values.
- Strong financial position and shareholder returns: With approximately $1.5 billion of free cash flow after dividends, SPG has the capacity to fund projects internally, increase dividends, and repurchase shares. The company boasts an attractive dividend yield of around 6.5% to 7%, and management believes the stock is undervalued, indicating potential upside for investors.
- Redevelopment projects are causing a drag on earnings, with significant contributions not expected until 2025-2026, as the company is "taking a step back" in 2024.
- Lower-income consumers are still dealing with inflation and reduced discretionary income, negatively impacting operations, particularly in Other Platform Investments (OPI), which had a "tough" year and did not meet budgeted expectations.
- Tenant sales per square foot are down slightly while base rents are increasing, raising concerns about the sustainability of rent hikes amid declining tenant sales.
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Dividend Outlook and Capital Allocation
Q: Will you return to pre-pandemic dividend levels?
A: We have $1.5 billion of free cash flow after our dividend and could increase the dividend to pre-pandemic levels, but our yield is already high at 6.5%–7%, compared to the S&P 500 under 2% and REIT peers in the 4% range. We prefer to use capital for share buybacks and believe our current yield is sufficient for investors. -
Monetization of ABG Stake
Q: Are you selling more of your ABG stock?
A: We sold about 2% of our ABG stock, reducing our ownership from just under 12% to just under 10%. We'll continue to monetize these investments and redeploy capital into our core business if we see better growth opportunities. -
Leasing Pipeline and Rent Growth
Q: How is leasing demand and pricing now?
A: Leasing demand remains very strong, even at 96% leased. New deals are around $74 per square foot, renewals at $65, and expiring leases in the $56–$57 range, leading to positive spreads. Low supply and strong retailer interest support continued rent growth. -
Sustainability of Rent Increases
Q: Can rent growth continue despite lower tenant sales?
A: Yes, current rents are sustainable as occupancy costs are at the low end of our historical range at 12.6%, previously up to 14%+. Reported sales per foot may be understated due to returns, especially from online purchases returned in stores. We believe supply and demand dynamics support ongoing rent growth. -
Future Initiatives and Expansion
Q: What are your key initiatives for the next 5 years?
A: We are focused on mixed-use development and redeveloping department store boxes. We're excited about growing our outlet business in Southeast Asia, targeting robust markets with young populations. We're also enhancing customer experience through technology initiatives like marketing, loyalty programs, and search tools.