Simon Property Group Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 4, 2025

There are 15 speakers on the call.

Operator

Greetings. Welcome to the Salmon Property Group Fourth Quarter twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Tom Ward. Thank you. You may begin.

Speaker 1

Thank you, Matt, and thank you all for joining us this evening. Presenting on today's call are David Simon, Chairman, Chief Executive Officer and President Brian McDade, Chief Financial Officer and Adam Roy, Chief Accounting Officer. A quick reminder that statements made during this call may be deemed forward looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward looking statements. Please note that this call includes information that may be accurate only as of today's date.

Speaker 1

Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form eight K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call this evening will be limited to one hour. For those of you who would like to participate in the question and answer session, we ask that you please respect our request to limit yourself to one question. I am pleased to introduce David Simon.

Speaker 2

Good evening. I'm pleased with our financial and operational results in the fourth quarter, concluding an exceptional year for our company. We reported record total funds from operation of $4,900,000,000 or $12.99 per share. We generated $4,600,000,000 in real estate FFO or $12.24 per share, which was growth of 3.9% year over year. We returned a record of more than $3,000,000,000 to shareholders in cash dividends.

Speaker 2

And now we have paid approximately $45,000,000,000 to shareholders in dividends over our history as a public company. We saw record leasing and retail sales volume and occupancy gains for the year. We completed last week the acquisition of the mall, two well known luxury outlet centers in Italy from Cary. We look forward to adding these high quality luxury assets into our global portfolio, while continuing to build upon their success. We opened a new fully leased premium outlet in Tulsa, Oklahoma and we completed 16 significant redevelopment projects during the year.

Speaker 2

Development and redevelopment opportunities are growing within our portfolio. We delevered our A rated balance sheet, providing additional capacity and flexibility to fund future growth. Now I'm going to turn it over to Brian, who will cover our fourth quarter results in more detail and provide our outlook for 2025. Thank you, David.

Speaker 3

Real estate FFO was $3.35 per share in the fourth quarter compared to $3.23 in the prior year, 3.7% growth. Domestic and international operations had a very good quarter and contributed 0.18 of growth. During the quarter, we sold assets that resulted in a tax benefit, which partially offset the prior tax expense from our ABG sale and essentially offset a write off of predevelopment costs associated with a joint venture development project in California. Leasing momentum continued across the portfolio. We signed more than 1,500 leases for 6,100,000 square feet in the quarter.

Speaker 3

For the year, we signed a record 5,500 leases for more than 21,000,000 square feet. Approximately 25% of our leasing activity for the year were new deals. Malls and outlet occupancy at the end of the fourth quarter was 96.5%, an increase of 70 basis points compared to the prior year. Our year end occupancy is the highest level over the last eight years. The mills occupancy was 98.8, an increase of 1% and is at a record level.

Speaker 3

Average base minimum rent for the malls and outlets increased 2.5% year over year and the mills increased 4.3%. Retailer sales per square foot was $739 for the year. Strong revenue growth across our businesses combined with expense discipline resulted in a 100 basis point increase year over year in our industry leading operating margin. Our occupancy cost at the end of the year was 13%. Domestic NOI increased 4.4% year over year for the quarter and 4.7% for the year.

Speaker 3

Portfolio NOI, which includes our international properties at a constant currency, grew 4.5% for the quarter and 4.6% for the year. Fourth quarter funds from operation were $1,390,000,000 or $3.68 per share compared to $1,380,000,000 or $3.69 per share last year. Fourth quarter results include $0.2 per share of non cash after tax gain from the combination of JCPenney and Spark Group. The mark to market fair value of Clay Pier's exchangeable bonds increased year over year, which offset a lower contribution from OPI operations. As a reminder, the prior year results include $0.33 per share in gain from the sale of part of our interest in ABG last year.

Speaker 3

Turning to new development and redevelopment. This year, we will open our first premium outlets in Jakarta, Indonesia in March and expect to begin construction on four to five mixed use projects throughout the year. We expect to fund these redevelopments and mixed use projects with our internally generated cash flow of over $1,500,000,000 after our dividend payments. Other platform investments, JCPenney and Spark Group combined to form a portfolio of iconic retailer banners called Catalyst Brands. Catalyst brings together Sparks Brands, Aeropostale, Brooks Brothers, Eddie Bauer, Lucky and Nautica with J.

Speaker 3

C. Penney in its exclusive private brands. Catalyst sold Reebok in early January and is currently evaluating strategic options for Forever twenty one. We view the Catalyst transaction as a positive development that will create significant synergies with a solid balance sheet that will enable the company to drive EBITDA growth. Catalyst shareholders include Simon, Brookfield, Authentic Brands Group and Sheen.

Speaker 3

Turning to the balance sheet. During 2024, we completed $11,000,000,000 in financing activities, including issuing $1,000,000,000 in senior notes with a ten year term and a 4.75% interest rate. We recasted our $3,500,000,000 revolving credit facility with maturity extended to February and no change in pricing or terms and completed over $6,000,000,000 of secured loan refinancing and extensions. Lastly, we delevered our balance sheet by approximately $1,500,000,000 in the year and ended the year at 5.2 times net debt to EBITDA. Our A rated balance sheet provides a distinct advantage with more than $10,000,000,000 of liquidity at year end.

Speaker 3

Additionally, today relative to our dividend, we announced a dividend of 2.1 per share for the first quarter, a year over year increase of 7.7%. The dividend is payable on March 31. Now moving on to our 2025 guidance, our real estate FFO and our real estate FFO guidance range is 12.4 to $12.65 per share. Our guidance reflects the following assumptions domestic property NOI growth of at least 3% increased net interest expense compared to 2024 of between $0.25 to $0.3 per share, reflecting current market interest rates and projected cash balances compared to 2024. Lastly, our diluted share count of approximately $377,000,000 shares and units outstanding due to the recent Catalyst Brands transaction, we will not include Catalyst guidance at this time.

Speaker 3

We expect there will be significant savings and synergies from the combination that will be coupled with potential restructuring costs. We expect catalyst will generate positive EBITDA in fiscal twenty twenty five and roughly breakeven FFO as they work through the combination. With that, thank you and David and I are now available for your questions.

Operator

Great. Thank you. We'll now be conducting a question and answer session. Our first question is from Jeff Spector from Bank of America. Please go ahead.

Speaker 2

Great. Thank you. I know that you'll get through some

Speaker 4

of the numbers through some of the other questions. I wanted to focus on some of the initiatives you have to bring people to the mall. I know you have the Tomorrow Stars, the Meet Me at the Mall when your traffic was up at pre malls, premium outlets. Can you talk a little bit more about some of the programs initiatives that you're doing to again bring the shopper to the mall? And how did those programs go for the holiday season?

Speaker 4

Thank you.

Speaker 2

Well, listen, I think we're leaders in this area. Our national advertising campaign is all about talking about how it's fun to go to the mall and hang out. Just like in the 80s and 90s, we had a very good reception to it. We rebranded Simon Premium Outlets to ShopSimon. We're in the midst of creating our loyalty program.

Speaker 2

So and then obviously we've got events, thousands of events that drive traffic through the year, whether it's breast cancer awareness programs, Valentine's Day, basically every major event that occurs within The U. S, we try to drive a event around that Easter down the road. So I couldn't be prouder of our marketing efforts. They're very digital. They're very fun.

Speaker 2

They use new media in a lot of ways. And I just expect that more and more and more importantly, we're seeing return on investment. And we've got the data to prove that. And not that our peer group is wide and deep, but to the extent that it is, there's nobody doing more when it comes to data, digital comments, commerce with Chuck Simon, marketing, events. You put it all together, were leaps and bounds compared to what else is out there.

Speaker 2

Thank you.

Operator

Next question is from Steve Saklik from Evercore ISI. Please go ahead.

Speaker 5

Yes, thanks. Good evening. David, you guys obviously had a great year with 21,000,000 square feet of leasing, occupancy up. Given where you're sitting on the occupancy side, I'm just curious how the discussions that your leasing team are having with the retailers is kind of shifting and maybe talk about the pricing power and how that's kind of returned to the mall for the A's? And I guess to tie that in NOI growth, you've talked about greater than 3%, but you certainly beaten 4% for the last like three years in a row.

Speaker 5

So what are we missing on the 3% front? And maybe just comment on pricing power. Thank you.

Speaker 2

Well, let me just talk about 3%. So look, we as we did last year, we budget flat sales. Why I don't really know, but that's what we do. And when you do that, we come up with a conservative number to the extent that we have sales growth like we did this year. Again, maybe not overall, but the retailers that matter, we generate overdraft, which obviously pops our NOI growth.

Speaker 2

So I hope we're being conservative. Obviously, there's pretty good animal spirits in The U. S. And its economy. We expect to participate in that.

Speaker 2

And again, I don't like the word pricing power. I just think we're able to we have deep relationships with our retailers and we're able to generate a lot of new business. We see new retailers approach us all the time and new uses all the time, which essentially allows us to and one of the big things to grow, we're never stuck with the tenant mix that we have. So what and I think Brian knows the numbers specifically, but I think 25% of our leases this year were new. So what's driving a lot of what we do is we're able to take the retailers that aren't doing the sales and replace them with ones that will.

Speaker 2

And that because they'll do better volume, that drives rent growth. And then I don't call that pricing power. I just think that's improving our mix and doing what we need to do to drive our business forward. And as I said, I think last call is, we still think we have an opportunity, because frankly, we've been organizationally very focused on that for no better word, the As. We do think there's real effort focus growth for us in the Bs where we're investing our dollars.

Speaker 2

So that's a big program for us in 2025 and 2026. And just to cap off your question, we still feel and again, it's hard to predict because there's always downtime, set of bankruptcies, etcetera. But we still feel like we have upside in our occupancy. We're still not at our time that was 97.1% if I remember right. In 2014, Tom Shadyen said yes.

Speaker 2

So we still some message to my leasing team if they're listening. I don't mind if they're not, if they're making a lease, but assuming they're listening, let's get up to our record high in 2014 and then we'll take a deep breath, but we won't until that.

Operator

Next question is from Michael Goldsmith from UBS. Please go ahead.

Speaker 3

Good evening. Thanks a lot for taking my question. Maybe just following off the last one, right, the NOI expectation dropped from 4% last year and for the last several years down to 3%. So bridging the gap between those expectations, right, it sounds like some of that is retail sales, but it sounds like occupancy, there's still upside, but is there the same magnitude of upside? And then also are you taking into account any sort of tenant bankruptcies or credit reserve in that as well, which is driving that 100 basis points?

Speaker 3

Thanks. Hey, Michael, it's Brian. So I think first, we've historically put out at least 3% at the beginning of every year, including last year and then have subsequently beat that, which we've repeated here. I think you just heard David talk about the overage component we budgeted, assume sales were flat. So there's a negative componentry mathematically to overage in the subsequent year.

Speaker 3

You heard us just talk about mix. And so as we swap out tenants for new tenants, there is downtime specifically associated with our full price business as we build out those stores. Last thing I would mention, you just mentioned bad debt. Our numbers in 2025 take into consideration our historical approach to bad debt. We did slightly better than that in 2024, but we've taken an appropriate expectation into 2025 relative to our standard approach.

Speaker 3

So those are the three major drivers that would get you kind of back to a from this year's number down to a 3% number for again as a baseline starting in 2025. Very helpful. Thank you very much.

Operator

Next question is from Craig Mailman from Citi. Please go ahead.

Speaker 6

Thanks. It's Nick Jesup here with Craig. David, just want to touch on the potential impact tariffs. Obviously, the news keeps changing. But just broadly, what are you hearing from your retailers?

Speaker 6

How is it impacting their business and kind of the uncertainty there and the potential impact of the de minimis exemption going away?

Speaker 2

Yes. I don't it's interesting, just our first I don't know where every retailer sources their goods. But if you take catalyst as an example, they only source 20% of their goods with all the brands of about 20 in China, okay? So and when we talk to Catalyst, their view of it is with respect to China that they'll pass some of it on to the consumer, but also hope that the supplier tightens up the cost of goods sold. So many, many retailers have moved a lot of production out of China over the last several years.

Speaker 2

And the good news is where we had kind of the most exposure was shoes, which Reebok would have been more exposed. But as you know, we dispose of the Reebok operating business in January. So no one is really honestly, it hasn't affected by day to day decision making and it's relatively reduced amount for the retailers. What's really going to be helpful to the American retailers and the non Chinese retailers is to get rid of the de minimis rule, which basically exempts tariffs if you send a package over $800 to a customer. That's not a level playing field.

Speaker 2

That causes retailers to pay more that shipped in bulk and it's given real benefits to someone like the Kangaroo where they've shipped purposely under the $800 But Congress has taken it up. I know the President is taking it up. And that will absolutely be, if enacted, we'll give a real shot in the arm to retailers that don't purposely, don't purposely try to send their goods to get under the $800 limitation, not only to say it's also more green, it saves packaging costs, etcetera. It's good for our country and I hope Congress and or the President enact it. That to me is more material than any tariffs that are being talked about.

Speaker 2

Very helpful.

Operator

Our next question is from Forrest Fandishkan from Compass Point. Please go ahead.

Speaker 7

Hey, thanks for taking my question. Good to hear your voice, David. A couple of questions, but I guess I'm going to focus on the your latest acquisition in Italy. I note that Kering just snuck into your top 10 list this past quarter prior to the acquisition. I'm curious if you can talk about that acquisition, the returns that you expect to achieve, how you might be able to manage those assets going forward?

Speaker 7

And also what would carrying percentage have been had they been included? I guess I know that your top 10 is domestic only, but how much of an impact would that have on the if you were to include Caring's exposure in Europe as well?

Speaker 2

Well, let's on that particular point, you'll see that in our next supplement. So it'll go up, but you'll see that in our next supplement. But I would say, we're under confidentiality agreement on the details other than the price. I will tell you, we've been very, as you know, very selective on acquisitions and we're only buying top stuff at the right price. This follows 100% of that strategy.

Speaker 2

So it's top stop at the right price. Kering will remain a long term tenant in that. They have a very they've had historically a very competent group that ran it for them, obviously, because they're not that's not their main business as you know. We've taken over that team. We'll help them with strategic guidance and we think there's upside in the business.

Speaker 2

We think it's NAV accretive for us. We also think it's earnings accretive for us. So it again is a something we wanted to do years and years ago, but they weren't ready to do it. We're extremely excited about doing it. The location, Italy is in a renaissance.

Speaker 2

So it's got one of the positive growths in the EU. And this is these are the kind of deals we want to do it by it at the right price. It's accretive to NAV, accretive to earnings, but it's also high quality with the right retailers. And we couldn't have done a we couldn't have picked a better asset in terms of this.

Operator

Thanks, David.

Speaker 2

Thank you, Paul.

Operator

Next question is from Greg McGinnis from Scotiabank. Please go ahead.

Speaker 8

Hey, good evening. David, following up on your comment regarding the focus on B Mall investments in 2025, '20 '20 '6, are you able to talk about the types of investments that you make in those malls, whether it differs from how you would approach investing in an AMOL? And then any detail on the magnitude of those investments and expected return? Thanks.

Speaker 2

I'll just be very generic. Brian can lay it out for you later. But to me, it's a whole combination of things. These are important assets in the communities. We've been focused on the bigger assets historically.

Speaker 2

So it's a combination of adding boxes, updating the look, feel of the place, restaurants, tenants, everyone changes a little bit differently. But I'll just take Smithhaven as an example. We're going to I got to be careful because I don't know if I can announce it even though the lease is signed. So they got announcements coming. This is in basically Eastern Long Island where we're going to update renovate the property, add a great retailer in a huge box.

Speaker 2

We just added Primark. Hospital just opened up their one of their health facilities. And that will probably be about a 12% return. And over the next couple of years. And it will be a renovated, rejuvenated asset that because of all the progress we've made in the bigger ones, we're able to kind of reenergize our focus on an asset like that.

Speaker 2

But there the list of those is long. So but Brian can go through it, but that's just one that kind of jumps to top of mind. And to my team, I'm supposed to see a press release on that, but I haven't seen it. So please move that along. Thank you.

Speaker 9

Phone one disconnected.

Speaker 2

Hello?

Operator

I'm sorry. Next question is from Alexander Goldfarb from Piper Sandler. Please go ahead.

Speaker 10

Hey, good evening, David. Good to hear you and I'm sure the people out of Smithtown will appreciate the dollar spend. Question on your guidance for 2025, obviously very good versus expectations despite the headwinds on the interest expense that Brian laid out. So my question is, is this back to sort of the old Simon days pre pandemic where you guys just had strong internal growth that was accelerating or is this more about removing OPI drag from the future? I'm just trying to understand if this is just all the side but not yet leases taking effect or if truly the underlying portfolio is accelerating and we're going back to where you guys used to be pre pandemic when the core portfolio was really just humming along.

Speaker 2

Well, the $12.4 to $12.65 excludes catalyst. The other investments in OPI are small. So they're and again, they're neither FFO is probably the wrong way to look at those investments, but they run through FFO anyway, because they're one is an asset management company and one is an e commerce marketplace and an e commerce retailer. And so FFO is the least important metric on those, but they run through our numbers. So catalyst is outside of that number.

Speaker 2

And I don't like the word old, Alex, but yes, we're growing the portfolio. When we said at least 3%, I think we've said at least 3% the last two years, eighty three percent, I don't remember, three years, Brian saying. So hopefully we can beat that. And that's basically all the stuff that leads to that, which is leasing, focused operational margins, events, Simon brand ventures, replacing boxes, restaurants, all of the basics and we still see that. I think we've had a pretty good run.

Speaker 2

Forget the big juice that we got back from getting back the business after we were unreasonably shut down by various state governments. But we've been clipping along four plus percent even though we guided to 3% and let's see how this year transpires, but we've got a lot going for us and the biggest of which is 2018, leasing is focused. We feel that there's upside in the portfolio across the board, but primarily in our historical bread and butter properties. We're going to do smart deals. We're prudent with a hell of a balance sheet.

Speaker 2

And I think and we're lease, lease, lease. I think it's not overly complicated. And then catalyst, well, it's obviously a big six months as they go through it and we'll have a better sense of kind of, it will be positive EBITDA for sure. We'll have better idea of FFO as the year progresses. But just to be clear, it's not in our number as of what we've guided to in the 12/1940 to 12/1965.

Speaker 10

Okay. Good to see the magic.

Speaker 2

Thank you, David.

Operator

The next question is from Juan Sanabria from BMO Capital Markets. Please go ahead.

Speaker 6

Hi. Great to hear your voice, David, as well. Just a question on the leasing. Looks like about 5% is still month to month. I think that's still kind of above where you were pre COVID in 2019.

Speaker 6

So just curious on how you think that will evolve over time? And is just like a second or Part B of a question, How has the S and O pipeline changed if at all over time? And could you just give us where it is as of year end, please?

Speaker 3

Hey, Juan, it's Brian. S and O at the year end was about two fifty basis points as we brought occupancy on in the fourth quarter and you saw that in the numbers. Month to month will as we move leases through our leasing process, ultimately not everything gets signed at the same time. So we put that into that category. Nothing there, we're in the process of renewals and year end leasing.

Speaker 3

And so ultimately, we would expect that number to come down throughout the year.

Speaker 2

I just would say we're slightly for the life of me, I don't understand why it takes so long. But put that aside, we do get our leases signed up and we are slightly ahead of where we were last year on our renewals. Inside, I should say. But we've got commitment on a lot of it, sure.

Operator

Next question is from Vince Tibone from Green Street. Please go ahead.

Speaker 11

Hi, good evening. I have a few questions related to the mixed use projects you mentioned earlier. So what is the expected pro rata spend on the four to five mixed use projects that you break ground in 2025? And also like what's the common structure? Are you doing this primarily on your own balance sheet?

Speaker 11

Are you using joint venture partners and then on retail components? And then also, is it mostly residential or like what are some of the other non retail property types in there? Sorry for

Speaker 2

the question. Yes. I'm sorry to interrupt you. So it'll be around $400,000,000 to $500,000,000 And again, we are when I look at the ones that we're expecting to start this year, they're all JVs and they will run from residential to a couple of hotels to office. And just to give you a sense what's in that category, we expect to start a hotel in Roosevelt Field, big residential project in Breaette, office at Clearfork and we're expanding a hotel at The Domain in Austin, Texas.

Speaker 2

Those are all pretty much planned for. I would expect this to add to that this year. As you know, we've got Northgate under construction. We are going to somewhat accelerate if we can anything we're planning in California. I am very nervous about construction costs there given the horrific events in Southern Cal.

Speaker 2

So we're looking at a couple of projects there that we might push before what's going on there. But I would expect us to add more to the pipeline, but those are kind of the ones that were pretty much so you got a shovel on the ground and then over, but those are all pretty much baked in the cake. And in this case, they all happen to be JVs, but that could change. No, that's really helpful. If I

Speaker 11

can maybe just squeeze in one more clarification. When you say joint ventures, like is Simon typically like a 10% or 20% partner in the non retail portion? Are you an 80% owner of the non retail? Just trying to get

Speaker 2

a sense of appetite for non retail. Yes. No, no, no. That's usually fiftyfifty.

Speaker 11

Yes. Great. Thank you.

Speaker 2

Yes. No problem. Thank you.

Operator

Next question is from Mike Mueller from JPMorgan. Please go ahead.

Speaker 12

Yes. Hi. I know you can't talk about the carrying pricing, but what's your sense as to how pricing on a comparable quality U. S. Assets would compare today?

Speaker 12

Do you think it'd be similar, stronger or weaker?

Speaker 2

I missed the questions. Can you say one more? I didn't understand. Can you reframe? Yes.

Speaker 2

So, yes,

Speaker 12

I was saying on the Italy purchase, we know you can't talk about the cap rate and the economics, but just curious as a hypothetical, if you have something comparable quality in The U. S, how would you imagine the pricing would compare to what you were in for in Italy? Do you think it would be stronger, higher cap rate, lower cap rate, something similar? Just curious of the thoughts there.

Speaker 2

It's a good question and I'm trying to think if I can answer it. I'll try to be artful. I would say, let me do a macro make a macro statement clouds Italy usually macro or even though properties are powerful and comparable, they'll tend to have higher cap rates than they would to The U. S. And obviously that calculus is important as to how we think about things.

Speaker 1

Got it.

Speaker 2

How was that?

Speaker 12

That was good. I think you pointed in

Speaker 2

a direction. There you go. Okay. I

Speaker 12

appreciate it. Thank you.

Operator

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

Speaker 13

Hi, everyone. Maybe just another question on kind of acquisitions or capital allocation generally, but it sounds like you were targeting the Caring acquisition for a while and I imagine there are many other deals that you've assessed over the past couple of years. So I was wondering if you could talk about the rest of the acquisition properties that might be out there that could be attractive to you and how you're balancing perhaps buying those versus your stock versus more redevelopment versus increasing the dividend realizing that you're kind of doing a little bit of all of that?

Speaker 2

Yes. Listen, I would say, Caitlin, that we're not there's no big, big deal that is on the drawing board. So we're still interested in a few high quality transactions. We're working on them. There's no guarantee.

Speaker 2

But I think since there's no big deal, we're going to do it all. And that's kind of my philosophy right now. So we may if there were a big deal to do, you can define big deal, but several billion dollars, billions of dollars, let's say, not Then we might have to readjust our thinking, but I think we're going to the mindset right now is we can do it all. Remember, we delevered. And so we're still working on a couple high quality transactions, but they're not like we're not going to tip the scales from a leverage or financial consequence or capacity point of view.

Speaker 2

And as you know, development, redevelopment is a three year product, just you build a house, you buy a house, it's one thing you need to build it, you got three years to stroke the check every year. So or every month, unless you have a really nice contractor. So honestly, I think we're going to do it all, redevelop. We don't mind buying our stock back. Obviously, subject to market conditions, we have the capacity to do so.

Speaker 2

And then I think redevelopment, development, we announced Nashville. We're really excited about that land. It's in the growth quarter. It's on the interstate. Great, great ingress, egress visibility, terrific long term 100 acre site.

Speaker 2

So we got stuff going on in Asia on development. Nothing really on new development in Europe. So just maybe a couple of things here and there, but we're also looking at expanding some of our better assets like a Woodbury or Toronto Premium Outlet or Desert Hills, etcetera. So that stuff is high priority. So right now, obviously things change, but right now, we're planning to keep operating the same way we're operating, a little bit of everything.

Speaker 13

Sounds like a lot of opportunity. Great. Thanks.

Operator

Thank you. Next question is from Hondo Fintjos from Mizuho. Please go ahead.

Speaker 14

Hey there, good evening. Thanks for taking my question and good to hear you David. My question, I guess, I wanted to go back a bit more to your plan on investing a bit more in your B assets here. I guess I'm curious, how you're able to generate the 12% returns versus I think the 8% to 9% we've seen in more of your A projects in the last couple of years. Is it the lower rent basis?

Speaker 14

Are you seeing, I guess, stronger any sense of stronger demand for space in any of those B malls? And is 12% more of an anomaly or more than norm for these B Mall investments you're making? Thanks.

Speaker 2

Yes, I think the simple thing is right now we have little to no income. But when we always give you a number on return, we're always backing out existing income. But in this case, if you have an empty box or empty space, there's no existing income and that really drives kind of the incremental return. That's the biggest element of it. And they're not all kind of the 12% I kind of referred to what we see as Smithhaven, but they're not all that way.

Speaker 2

But in a lot of cases, it's just empty space or an empty box. And it's income, basically, there's no offset against it because there's no existing retailer or and then it's just the capital we have to put in to do it.

Speaker 14

Got it. I appreciate that. And just thinking about that 12%, does that kind of reflective of the incremental risk return or risk premium perhaps for some of these assets? Just curious how that perhaps would

Speaker 2

I think that's a good that's a good point, but I would recharacterize. So let's say there's a and again, our B malls are probably some people's better than A malls, but let's just take a B mall and where we think the value very simplistically is an eight cap rate, okay. We wouldn't want to invest in that asset at a six GAAP return because that would be dilutive to NAV. So part of what you're going to see and are seeing is we really look to improve that kind of portfolio is if we can't make any accretive investments, we won't do it. So we're better off in that case just managing the cash flow to the best of our abilities.

Speaker 2

So I understand your point. I kind of recharacterized it, not because of risk, not really risk adjusted. It's more what's the value of the asset and will this add to the value of that asset. Follow what I'm saying?

Speaker 14

Absolutely. And that's partly what I was getting at. So I appreciate that. Thank you.

Operator

Next question is from Linda Tsai from Jefferies. Please go ahead.

Speaker 9

Yes. Hi. Regarding the comment that you buy only really good stuff after carrying, do you see more opportunities abroad or domestically?

Speaker 2

I would say mostly domestic, just because it's got to be really unique, which is what we saw the model, which is rare. And again, as I mentioned earlier, I think I talked to them, hard to remember, but it was definitely a couple of years pre COVID. So I just think there's very few jewels like that in Europe that makes sense with what we do in Europe, if you understand what I'm saying. So we're not going to buy a mall in Europe, just to have one mall in Europe. So the outlet business we view a little differently.

Speaker 2

So I would say by because of that, that would be really unique and more domestic, I'd say more domestic.

Speaker 9

Thanks. And then how are you feeling about the consumer right now and high versus low end, U. S. Versus Europe?

Speaker 2

Well, I think they're very cautious in Europe. And The U. S. Consumer is still I'm still nervous about the lower end consumer. The better to the upper income, I feel pretty confident about that.

Speaker 2

A lot of whipsaws going on left and right. So it's very hard to predict, but generally still concerned about the lower end, pretty bullish on the upper to high end consumer.

Speaker 13

Thank you.

Operator

Next question is from Ronald Kamgren from Morgan Stanley. Please go ahead.

Speaker 3

Great. Hey, if we could

Speaker 6

just go back to sort of

Speaker 3

the strong performance last year, wondering if we could dig in a little bit, between sort of the outlets and the mall business, any sort of call out what drove the performance? Is it traffic? Is it higher ticket prices, so on and so forth? And the second part of the question is really, are you seeing any impact from the strong dollar on tourist centers? Thanks.

Speaker 3

So Ron, it's Brian. There wasn't a big bifurcation kind of between asset classes. I think all three platforms performed exceedingly well. You did see the outlet in the mills, which generally skew a little bit more value oriented to outperform a little bit into the fourth quarter, wasn't really kind of an anomaly, just kind of expected performance. And we've not seen any real time impact yet to the tourist oriented centers, but we're February 4, so still early in the year.

Speaker 3

But But we would expect to see or if we continue to see dollar strength, we can see some impact over the course of the year, certainly in our translations of our foreign earnings. Thanks so much.

Speaker 2

Yes. And I would just say, when we talk about reenergizing on the assets, don't just think malls, think outlets, think a few of our mills. So it's a wide portfolio focus, not just when people talk B, they always take malls, but for us, it's across our entire domestic portfolio.

Speaker 3

Helpful. Thank you.

Speaker 11

Thank you.

Operator

This concludes the question and answer session. I'd like to turn the floor back to David Simon for any closing comments.

Speaker 2

Okay. Thank you, everybody. And look forward to talking in the future.

Speaker 14

Thank you. This teleconference.

Operator

You may disconnect your lines at this time. Thank you again for your participation.

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Earnings Conference Call
Simon Property Group Q4 2024
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