Simon Property Group (SPG -0.68%) recently reported a strong second quarter, with funds from operations of $2.16 per share, exceeding estimates by $0.03.
CEO David Simon, who's been at the helm of SPG for twenty years, struck a confident tone on the conference call, as he gave investors and analysts insights on why he thinks the good times will continue for the mall and outlet operator. Let's look at a few quotes from the call that touch on some major themes for the company.
1. Traditional retail isn't dying
"Overall, business conditions remain favorable, driving the increases in our key operating metrics in our cash flow. We continue to see strong demand for space across our portfolio, [and] occupancy [is] up in malls, premium outlets, and the mills."
--David Simon
Despite a slew of weak results coming from the retail sector over the past several quarters, retailers are still clamoring to be part of Simon's excellent real estate portfolio. SPG's occupancy rate in the United States was a strong 96.5%, up 1.4% from a year ago. Simon is going to continue investing for growth. It expects to spend over a billion dollars annually through 2016 building new malls and expanding or redeveloping properties in the United States and abroad.
2. Demand for space in SPG's properties will drive up rents and net operating income.
"I don't think people appreciate how much better our properties are getting as places where retailers want to do business. We've talked in the past how there are number of new entrants that want more square footage. It's a supply and-demand business, and as our properties are getting more desirable we have more demand, limited supply, [and] we're able to drive rents."
-- COO Rick Sokolov
For a real estate company, your competitive advantage is your properties. Proof of SPG's great real estate portfolio and the demand from retailers to be a part of it shows up in the rent metrics. Releasing spread, which measures how much rent rises from an old lease to a new lease, and minimum base rent per square foot are not only growing at double-digit rates, but the growth is also accelerating at a faster pace than last year. And despite a quickly rising pace in this year's rents, David Simon said the company is still "under-market rented" and that rents have more room to rise.
3. SPG's size and strength let it borrow at great interest rates, allowing it to grow even faster
"Now, capital markets, just briefly we did amend and extend our $4 billion unsecured multi-currency revolving credit facility with a June 2019 final maturity at LIBOR plus 80 basis points, which is a tighter spread in our industry."
-- David Simon
This seemingly throwaway comment squeezed in between other topics caught my attention.
For a real estate company that is continually in need of capital to maintain and redevelop its properties, low borrowing costs are its lifeblood. Simon is the largest U.S. REIT by market cap, and with a strong balance sheet and an S&P credit rating of "A," lenders are going to feel more comfortable lending to SPG and not demanding the same risk premiums.
Not only do lower rates flow directly to the bottom line, but low borrowing costs also allow SPG to tackle projects that companies with higher costs of capital can't touch.
4. Brand matters no matter which industry you're in
"If you don't think of your company as a brand going forward, you're going to miss out on opportunities."
-- David Simon
We all know brand matters in retail; consumers will pay more for a handbag that says "Kate Spade" on the buckle than for one that says "David Spade."
But even for non-mass-consumer-facing businesses like Simon Property Group, brand familiarity and reputation are important for customers.
In Q2, Simon Property Group began an aggressive marketing campaign to "create a whole new way to engage with consumers." Management said the initial feedback from customers of the ad campaign was very positive; however, it was cagey with the details about how the company is measuring the effectiveness of the campaign.
I'll be interested to tune in to next quarter's call to see whether management offers more details.
5. Simon Property Group can thrive in alongside e-commerce
More telling than anything said on the conference call was what wasn't said.
Not once were the words "Amazon" or "e-commerce" mentioned.
Source: U.S. Census Bureau.
Even though e-commerce is taking an ever-increasing share of retail sales in the United States, Simon Property Group is confident that its business can continue to thrive. With high occupancy rates and strong demand for space despite rising rents, it appears e-commerce has yet to faze this company.
SPG management used the conference call to highlight a business that's firing on all cylinders. The company raised full-year 2014 FFO guidance and highlighted a number of projects that should fuel growth for years to come. It would be hard for SPG shareholders to not be thrilled with this quarter.
