Simon Property Group, Inc. Q3 FY2025 earnings call

• Completed acquisition of the remaining 12% interest in Taubman Realty Group at an overall cap rate of over 7.25%, which will be accretive in 2026 and fully accretive in 2027 with operational efficiencies adding at least 50 basis points to the yield.
• Began construction on several new projects in the third quarter, including residential, hotel expansion, and retail additions. At quarter end, share of net cost of development projects was $1.25 billion with a blended yield of 9%, 45% of which are for mixed-use projects.
• Third quarter real estate FFO was $3.22 per share, up 5.6% year-over-year. Funds from operations were $1.23 billion or $3.25 per share. Announced fourth quarter dividend of $2.20 per share, a 4.8% increase year-over-year.

Real estate FFO was $3.22 per share in the third quarter, a 5.6% growth from $3.05 in the prior year. Domestic and international operations contributed $0.26 of growth due to an 8% increase in lease income. Malls and Premium Outlets ended the third quarter at 96.4% occupancy, with an average base minimum rent of $72.36 per square foot and retailer sales of approximately $1,200 per square foot. The Mills achieved a 99.4% occupancy. Average base minimum rents increased 2.5% year-over-year for Malls and Premium Outlets, while the Mills saw a 1.8% increase. Retailer sales per square foot for Malls and Premium Outlets were $742 for the quarter, with total sales volumes increasing more than 4% in the third quarter.

• Increased full year 2025 real estate FFO guidance range to $12.60 to $12.70 per share, up from the prior range of $12.45 to $12.65 per share.

• Tariffs could impact retailers, with potential pass-through to consumers or suppliers, not yet fully felt. - External factors beyond the company's control that could affect performance.

Q: In the prepared remarks, you mentioned the opportunity for operational efficiencies and improvement for the Taubman assets twice and that these should help improve the yield by 50 basis points. So can you share some of the specifics of the opportunity from bringing these assets fully on to your platform?

A: David Simon discussed that bringing Taubman assets on to Simon's platform would add operational synergies, efficiencies, and enhancements, moving the cap rate north of 8% from the initial 7.25%, leveraging Simon's expertise in development, redevelopment, leasing, etc.

Q: Eli, welcome to the public earnings call. You now get all the enjoyment that David has had over the years. So David, just going back to the cap rate, and if you'll indulge me a little bit, if we take the implied cap rate of the shares issued on Friday, it's sort of a little over 6%, but you spoke about an 8%, which sounds like the existing assets were producing a lot more the overall versus the final buyout trade. But then you spoke about the initial 50 bp increase once it's on Simon's platform, but presumably, there's a lot more growth over the next 5 or so years that presumably that 8% goes higher. So one, can you help us understand sort of the pricing of the final 12% and how that relates to the 7.25% that you initially spoke about? And then over the next few years, presumably, this cap rate is going to be much higher than an 8%.

A: David Simon explained that the initial 7.25% cap rate for the Taubman acquisition, with operational synergies and enhancements, moves to north of 8%, and there's intrinsic growth in the portfolio expected to further increase the cap rate over time.

Q: Congrats on the quarter and recent announcements and yes, welcome Eli, to the earnings call. Maybe on the sales results, they increased in the quarter, which was great to see. Could you give any detail on how widespread that was? Did a couple of tenants drive numbers one way or the other? I know you have initiatives to upgrade the tenant base, maybe shrink where it makes sense. So just whether we're starting to see some impact from those initiatives?

A: Brian McDade stated sales increase was widespread across all 3 platforms, with certain categories like luxury and athleisure outperforming. David Simon added that higher-income-oriented centers skew better results, while value-oriented centers are more flat, but there's potential for more growth.

Q: Brian or David, you've generated very strong NOI growth year-to-date, 5% for the quarter. I guess given the solid leasing environment you're seeing, just trying to see if you can keep up this sort of same-store momentum in '26 or even do better, assuming a sort of a similar retailer sales environment. Curious on your thoughts.

A: David Simon and Brian McDade expressed optimism about '26, with the team feeling positive about comp NOI growth, though specific numbers would be provided in February earnings guidance.

Q: So from our perspective and despite our expectations, tariffs have had seemingly little impact on shopper or retailer behavior to date. And David, I know you previously mentioned that maybe the holiday season is when we start to see some impact to retailer financials, but we were hoping for an update on what you're seeing in your retailer discussions and regarding your expectations on any impact to leasing and/or tenant behavior?

A: David Simon discussed that tariffs could impact retailers, with potential pass-through to consumers or suppliers, not yet fully felt, and still expecting some impact moving forward.

Q: Maybe going back to your comments earlier about the value mall, kind of the foot traffic going on there versus your higher-end mall. As you look at '26, I know you guys said you feel very good, but -- and the tenant demand. As you guys approach conversations with tenants who are looking at both high end and kind of the value segment from some of that crossover, do you feel like you guys are losing a little bit of momentum in the ability to push net effectives at the value side of the portfolio? Or the inflation over the last couple of years just pushed OCRs to a point where you still feel like you're able to get pretty good upside relative to maybe where you're pushing in the luxury or the higher-end malls?

A: David Simon stated that traffic in value-oriented centers is up, but sales are not increasing at the rate of higher-end centers, with the lower-income consumer being more cautious, but no major change in mood or potential.

Q: I wanted to ask on the new leasing in the quarter. Brian, I think you mentioned it was about 30% of the total leases executed. Is this you all proactively looking to get ahead of leases that might expire in a year or 2 and upgrade the credit quality? And can you also give us a sense if you're seeing more of those new-to-mall concepts coming in the portfolio? And lastly, anything you can comment on leasing spread for that would be helpful.

A: David Simon and Eli Simon mentioned new-to-mall concepts like Meta, Google, Netflix opening stores, with Brian McDade stating the 30% statistic is new leases, reflecting demand for interesting and new uses, and the team is proactive in upgrading tenant credit quality and bringing in new concepts.

Q: Just hoping maybe to talk a little bit about technology. A lot of things in society seem like they're in flux and retail is not excluded there to talk about ChatGPT agents or agentic agents that can do some of the shopping bypassing people. Just curious on how you guys are trying to position for this and your thoughts on how this may evolve and if you see it as a risk or an opportunity or both?

A: David Simon discussed that AI will impact e-commerce, but retail offers a broader experience, and Simon has lasted 70 years, expecting people to go to malls even with AI, as they provide a holistic shopping environment, and Simon is experimenting with AI to enhance operations.

Q: I wanted to follow up more time on the Taubman cap rate. Just specifically, if you -- look, the way I'm looking at it is just the purchase price is just over $1.5 billion if we use Friday's close for the OP unit value plus incremental debt. And then trailing 12-month NOI is right around $77 million for 12% of Taubman using your supplemental. So that's more like a low 5s cap rate on a trailing 12-month basis. So I mean, is it really that much synergies to get to the second quarter, second half?

A: David Simon stated they provided accurate numbers, emphasizing Simon's assets have better growth and longevity, and the deal will deliver on the expected synergies.

Q: So Taubman has used a secured debt strategy for the portfolio ever since the '98 restructuring. Do you think you'll be unencumbering a number of those assets over time? And as a follow-up, are there any parts of that portfolio that look like they're sale candidates today?

A: Brian McDade stated they expect to unlock secured debt over time to unencumber assets, and currently, the portfolio is comfortable but evaluated frequently for potential sales.

Q: It's Adam on for Ron. I think we had always looked at the dividend sort of post-COVID as I think you guys are sort of targeting getting back to that pre-COVID dividend level. You're now past that. So I guess just sitting here today, how do you sort of stack rank the capital allocation priorities? I know you've talked about sort of development of -- obviously, of the Class A assets, but also, I think you've talked in recent quarters about some of the Class B or B+ development opportunities or redevelopment opportunities as well. So just sitting here the different options in terms of capital allocation, how do you sort of stack rank those dividend buybacks potentially development, redevelopment, et cetera?

A: David Simon discussed capital allocation priorities, mentioning they aim to quarterize the share issuance from the Taubman deal, continue to grow the dividend, and focus on accretive development projects like those in Nashville, Boca, Fashion Valley, etc.

Q: I know we're running late. David, great to hear your voice. Eli, again, I'll not be the first one to welcome you, but good to have you on the call as well. And David, I love your passion. Question for你. I'll try to keep it relatively short here, but your S&O pipeline, could you talk about that? And I note that Kering has dropped out of your top 10 tenants list. Presumably, they haven't closed any stores. Is that just you haven't signed new leases or they haven't opened new stores in the portfolio? And maybe talk a little bit about in that S&O, how your luxury is trending or how you expect that to trend maybe?

A: Brian McDade stated the S&O pipeline is 310 basis points as of 9/30, Kering dropped out of top 10 due to robust leasing activity with other retailers, and luxury cohort of tenants continues to favor the portfolio with growth.

Q: Eli, congratulations. Welcome aboard. In regards to OPI, just curious what you guys are -- how you're thinking about that business again, is a little bit more value-oriented. I'm just kind of curious if there's opportunities to kind of monetize that? Or is just the world too murky right now to really有 an opportunity?

A: David Simon discussed that Catalyst is doing a terrific job with brands like JCPenney, Aeropostale, Brooks Brothers, etc., providing value to both high and lower income consumers, and they will evaluate monetization opportunities if beneficial.