Alright, everybody, why don't we get started. Good afternoon. Welcome to the Simon Property Group roundtable. I am very happy to have the Simon Management Team here with us today: Eli Simon, CEO; Brian J. McDade, CFO. Let me turn it over to you, Eli, with some opening remarks.
Great, thank you. Samir, it is great to be here. I will keep this brief so we can get to your questions. Overall, leasing demand remains unabated. Big picture: the operating environment remains very favorable for us. Retailer demand is strong across our platforms, across categories, and across geographies. Retailers continue to prioritize physical stores, and demand for our space in our portfolio remains robust. Through the first half of the year, we signed more than 2,300 leases, totaling over 9.5 million square feet. Approximately 27% were new deals, and our pipeline is running well ahead of last year's pace. New deal rent per square foot is up 17% versus last year, while TAs per square foot are down 12%. Demand spans apparel, dining, entertainment, and health and wellness.
What excites me most is the new and emerging brands coming to our centers from online, from Europe, and from Asia. The consumer is showing up and continuing to show up at our centers. Shopper traffic is up and accelerated throughout the back-to-school period. Retailer sales are also up alongside traffic, and it is broad-based across categories, geographies, and platforms, which are all positive. We continue to invest in our portfolio. We have approximately $1.1 billion of projects under construction at a 9% yield, roughly half of which is mixed-use. Another $600 million is expected to start by the end of the year, with a pipeline of more than $4 billion behind that. We also continue to reinvest into our portfolio, with large-scale renovations and center enhancements. These investments are noticed by our customers and, more importantly, by the retail community.
We own great assets and never stop investing in them. We take a long-term view, continually reinvesting through renovation, redevelopment, and enhancement projects to make our great assets even better. As a result, many of our properties are more relevant today than when they were developed decades ago. Great assets matter, and so does having the patience and discipline to continuously improve them. Our naturally de-leveraging balance sheet gives us tremendous flexibility to fund these opportunities while also maintaining a disciplined approach to capital allocation. Overall, we feel very good about the position of our business today. With that, happy to get to your questions.
I'll start, but let's keep this interactive. If anyone has any questions, please chime right in. On the leasing side, occupancy is around 96%. Where do you see the biggest opportunity to drive core growth, Samir?
The biggest focus, which has always been our focus, is to make sure we have the most relevant merchandise mix out there. That's, I think, what separates us from, frankly, anybody else, is that our centers are going to be home to the newest, the greatest, the best brands out there, whether they're coming from online, coming from Europe, coming from Asia. Occupancy has room to grow, no doubt. I think I said on the last call that, we anticipate being above where we were at the end of last year. We still anticipate being above where we were at the end of last year by the end of this year. We don't stop then, right?
We don't stop and say, "Okay, we've hit our peak occupancy, we're going to take a break." We say, "Okay, how do we make these centers better? Where do we move tenants? Where do we find new tenants?" It's that, plus the continuous reinvesting into the assets. We're developing, we're redeveloping, we're adding square footage to centers, we're adding exterior-facing, we're adding outdoor square footage, adding new restaurant pads. We're doing it across the country, in big centers and small centers, across different platforms as well. When we look at it, we have tremendous demand, tremendous demand for our product today. Our job is to choose the right tenant and the right tenant for that space, and then go to the next center and keep on doing it. We're excited.
The pipeline remains up, 25%+ similar to how it was at the end of the second quarter. Our job is to just continue to execute on that.
The leasing pipeline?
Yeah.
How is the consumer holding up here, right? Clearly, a bit of noise outside in the macro here, a lot of questions from that perspective. What are you seeing across your platform today? And whether it is discretionary or necessity, but what are you seeing generally?
The consumer has remained healthy and has had zero slip-up from when you know our last earnings call. If you look, the second quarter, sales—comp sales—were up, I want to say, 5.7%. Traffic in the first quarter was up 1.3%. The second quarter was up 2%. In the quarter to date, so July and August, it is up 3.4%. The consumer is coming. Sales are up. I think, you know, our customer—I think most people—don't know what the 10-year is at, right? I think, you know, people in this room understand what the 10-year is at, but most people do not. They understand, you know, where their equity book is at. They understand how they feel. Unemployment is down, wages are up, shoppers are shopping, and our sales are up.
We have seen no change in the consumer, back-to-school, across the board, across geography, across platform. All the retailers we speak with, everyone, you know, not just met expectations, but actually exceeded expectations. We are, you know, very pleased. Obviously, things can change, and so we monitored in real time, literally today, but we have not seen anything to make us think that the consumer is having a material pullback in any way.
Go ahead.
I was just going to say, how does your scale size benefit or help you grab that market share of the leasing? Let's say there is that new international retailer. You know, how is the business, you know, international, domestic, interacting to help drive that?
Yeah, I mean, listen, scale and share, you know, what we focus on is our relationships, and we think we have the best relationships. Our job is to make sure we have the best relationships with the retailers. We have a team that goes and gets on the plane and goes to Asia, gets on the plane. I met with a CEO from the U.K. yesterday of a great brand that has one store today, and I bet we'll have 50 stores in the next several years. You know, we view it as our job is to make our properties great, make the properties that tenants want to come in, and then go find new and emerging brands. I think we've done a pretty good job of that. We've got more to do, but we're going to continue to do it.
You know, we look at it and say, there is no doubt that the U.S. is where retailers want to be for growth. I think that's sort of, you know, that's not debatable anymore, right, with what's obviously gone on in the Middle East, for sure what's gone on in China. You know, obviously, Europe has its own challenges. So there's no doubt that if you want to grow, you have to grow here. We like that we're long U.S. retail real estate, you know, with those factors.
Yeah. I mean, Jeff, I guess I would only add to that. The scale, it is important, what have you, but it is about relationships, and it is about the bargain that we, you know, we stand up to our commitments, right? The retailer community knows what they are getting when they do business with Simon across the spectrum. So, you know, that repeat business is really important because, you know, that is not the case away from us by and large. So knowing what your experience is going to be, knowing what the, that we are going to execute on what we say we are going to do, carries a lot of weight in the overall scheme of our ability to generate business.
I mean, you talked about scale. I mean, you know, you have got a big platform. You launched Simon Media Network.
Yep.
Recently, right, which allows brands to connect with consumers. I guess, given the amount of consumer data you have out there, help us understand kind of how you see that enhancing the platform over time.
Yeah, I mean, listen, it is, it is, I think, literally launching, you know, October 2nd, right? So we will see. But we are bullish. We are bullish. We have, you know, hundreds and hundreds of millions of visits a year, you know, tens of billions of dollars in sales. You know, there is obviously, you know, a handful of really large retail media networks out there. Are we going to be that big? Probably not. But do we think we can have a real business? You know, if you think about our customer is going to the mall or going to an outlet center to shop, that is a pretty high propensity to spend customer. It is a, you know, generally speaking, the higher income demographic.
I think what we are seeing is, you know, since we put out the press release, you know, two weeks ago, maybe three weeks ago now, we had a ton of inbound. What is interesting is we had a ton of inbound, not just from retailers, who that is sort of obvious, but from travel and leisure companies, airlines, hotel brands, credit card companies, right? Other types of companies that sort of say, "Oh, that is actually a pretty interesting data set to target," because, you know, if you are going to the mall, you are going to the mall to shop, right? So you know this is a qualified customer. So we will see.
But, you know, this is sort of the next leg of a journey that we have been investing into our media business and our, you know, advertising business at the malls for long before it was cool and, you know, people came up with names for their programs. We have been doing this for a long time. We have over 4,000 screens in our centers. We are adding more. We just approved on Monday another—I forget what it was—10, 12 centers. We are going to do another set in October. We are continually adding because brands realize this is a great place to capture eyeballs. So, you know, I think it shows that people want to be at our centers. We know the shoppers do. We know the retailers do. I think now the broader, you know, advertising community sees that as well.
Eli, this is time last—this time last year you talked about the app, and I think you started talking about some of the insights that it gave you.
Yep.
You mentioned that one of the most searched items was Labubu.
Yep, yep.
Stop at that point.
Yep.
I am just curious how that app could maybe interact with this business and just any trends that you are seeing lately with that data that.
Yeah, 100%. We launched Simon+ a little bit after this time last year. That was it was basically done, and we kind of waited towards holiday. It has been awesome. What has been great is it has given us great insights of, you know, I do not like using names, but if you go to store A, you also went to store B and C. As we think about our merchandising mix and our discussions with tenants, that is really insightful. That is something that, frankly, nobody else can have, that scale. Then we know what you do online on shopsimon.com. We have created this ecosystem, both physical and online, that gives us, you know, real-world data points on what the consumer is doing.
We use that for our Simon Media Network, but also for our own leasing and understanding of what retailers are trending, what categories are trending. We use it, our leasing team uses it, we have a new data team that analyzes it, see where things are spiking by parts of the country, by type of platform, outlets, malls, etc. It is pretty cool. We are early days, but we feel pretty excited about the opportunity here to do something that, frankly, nobody else can do.
It gives us an opportunity for first-person data collection. We as the landlord, we are traditionally behind the retailer with their point of sale, but by using our loyalty program and app, we can see the transactional activity that is happening in our assets. That gives us a leg up, to Eli's point, to monetize it, but also to better operate our business.
Yeah.
A decade ago, Amazon and e-commerce was going to wipe you guys out. No one was ever going to a mall again. That obviously has not happened. Let me ask you about agentic AI, as one theme, and then convenience is another theme. Combining the two of them, agentic AI and convenience, I just want my stuff delivered. I do not want to deal with people.
Sure.
It is higher gas prices. I do not want to be bothered. How do you see that, the combination of those two things today and given where agentic AI is going? Secondly, very separate question, but very basic, which of your tenants and brands are you most excited about, and which ones are you most worried about?
This is recorded, right? I hate using names. There is a lot of—I would say there is, you know, I would say there is a lot of companies, or there is a few—I do not want to use names, but there is a few companies really targeting the Gen Z customer today that we are incredibly excited about, and that we are adding throughout the portfolio. I do not like saying, but on the agentic AI, I actually think it is fantastic for us. And I think it is fantastic for us for two reasons. One is, as people become more and more, you know, on their devices, not talking to other people, we have seen—and coming out of COVID, and, you know, we have seen this now for a number of years—people want to do things. They want to come to the center.
That is why our traffic is up. They want to hang out. They want to go to restaurants. They want to go to, you know, they want to go to the movie theater. They want to take pictures. They want to hang out with their friends. And that is from all age groups. Our biggest growth is the most online group, right? The Gen Z customer and even, you know, the generation behind it, they are the ones who are driving a lot of the growth in the mall right now. And they are driving it because they are, you know, on their phone all day. Their teachers are now AI, right?
They are not—they do not have sort of that normal experience of, "Let us go hang out with our friends," and sort of, "This is the place to do it." This is the proverbial town square in so many of the communities across the country. So on that end, we feel very excited. On the other end, if you are a retailer, it is so hard in an agentic AI world to control your brand presentation, right? You, on your own website, XYZRetailer.com, it is very easy to control your brand presentation.
Well, if now all of a sudden people are getting there through, you know, pick your AI agent, you are not going to be able to show them your full breadth and depth of your assortment, of what your brand is about, you know, right, the packaging, the, you know, what does the store look like? You cannot do any of that now.
You can do it online to some degree, but you cannot do it—you cannot, I mean, again, today, and I do not know how you are going to be able to do it in sort of a pure, you know, on a ChatGPT. That is just not going to show up. That makes stores even more important because that really is the best place to control your brand presentation to say, "This is what we are about. This is our customer. This is who we are targeting. This is our full, you know, assortment of our top merchandise." And I would say it is your best customer acquisition vehicle. There is no other customer acquisition vehicle that is going to come close to it.
And if anything, it is going to become harder to find those customers on a social media platform, on Google, etc. It is going to be a lot harder. I think it is actually incredibly bullish for us because you are going to have to, if you want to be a brand and you want to be in business, if you do not have a store fleet that is updated, that is modern, that looks good, and that reflects the brand the way you want to do it, you are not going to be able to do it anywhere else. For those two reasons, we think this is great for us. We really do.
People can say, "It is going to go away," and that is, we will keep growing cash flow and growing NOI in the meantime, and paying a growing dividend and, in 10 years, it will be the next thing. Then people will say, "Well, 10 years ago, AI was going to kill the mall," and whatever the next thing is. So we feel really good about it. Really good about it.
With the data and last year, again, I think tied to what Sarah was talking about, the membership program, I guess, how is that helping you improve the shopping experience? You talked about how you are using it to help with, let us say, leasing.
Yep.
Maybe even development. Is it, you know, tying back to what you said earlier, maybe that how you are curating the malls, who you are bringing in, but, you know, yeah, how is it helping the shopping experience? Is this also early stages that you think over time, you know, you can keep, you know, pulling in more traffic to your centers?
Yeah, I mean, I think 100%. I mean, it is all the data, all the insights, but you are literally, you know, if you are a member, you are getting rewarded for if you shop at any of the stores in the mall. So unlike, you know, if I am a member of this retailer's loyalty program and I go to the mall and I only go there, but I go to two places, well, I only get loyalty. Well, here, you get, if you are a member of our program, you get loyalty points for all of it, plus the loyalty points you get from the actual retailer itself. And then we have the ability, the customer has the ability to earn the rewards online or in-store. It is actually a tremendous value proposition, and we are seeing it.
Again, it is not even a year old, and, you know, we have added, you know, millions and millions of customers, but it is a tool that, you know, as it gets more mature and, you know, obviously more awareness, people are going to realize, "Well, I can get points. I get my Amex points, right? I get my Simon+ points. I get my retailers' points." You could stack it on top of each other. Then I am going to go and, you know, get a free pretzel or go get, you know, a big discount at this retailer or a free, you know, keychain at this retailer, right? You know, we have tens of thousands of different rewards on there. So it is cool.
We think it is, you know, we are as bullish, more bullish than we were this time last year, sort of right before launching, as it is today, you know, almost a year into the program.
But I think, Jeff, it is also allowing us to understand the shopping pattern of people and consumer and making sure that we are organizing our stores around neighborhoods. You know, you have seen a big change in our business in the last decade around putting like tenants in similar neighborhoods and shopping next to each other. A lot of that is just informed by our data. You can see the cross-pollinization of shopping, you know, putting XYZ athleisure brand next to Y athleisure brand. They do not know what is happening other than what is in their own stores, but we have that visibility, that halo effect of being able to look down and getting better productivity. So we are making better merchandising decisions on just simply where retailers are going in our centers by having a better understanding of the consumer and the traffic patterns we are seeing.
You took back about 1 million sq ft of space, right, in the quarter. Even with that very strong occupancy you had, but with the space you took back, Saks Boxes, talk to us and kind of, you know, what's been sort of the releasing, where does that stand? What sort of conversations you're having just to give us an idea of the demand here?
It's done, right? I mean, it's done. It was sort of what I said last quarter. Maybe I should have been clearer, I guess, but I mean, we took the $18 million - $44 million. It's basically all signed, if not out for signature. It's a retailer. We move on. We added better retailers. It, you know, wasn't even a blip on our radar. It was just normal, ordinary course where we got really good real estate back. We're happy when we get really good real estate back. We lease it at higher rents and we go on with our business.
I mean, it's a function of the, it's an indication of where supply and demand in the marketplace is. The fact that we could absorb 1 million sq ft and release it in 90 days is really a function of just the backdrop that we're seeing across the, from the Simon perspective, across the U.S.
That's all rent paying and coming through, or?
It will come at the end of this year, next year 2020. I mean, you know.
From a timing perspective.
Yeah, but it is less immaterial.
Okay, okay. Then maybe just on the, as we think about, you know, as you evaluate potential acquisitions today, what makes an opportunity attractive to you? Like, what kind of spread relative to your cost of capital do you need to see to justify deploying capital here?
Yeah, I would say, I'll answer the first part. What makes an interesting acquisition opportunity is an asset that's brand accretive that we can add value to and at a fair price. My personal view is those type of assets should not change in value if the 10-year goes up and down 25, 50 basis points because we're not traders. We're into this business forever, and great retail real estate today is more valuable than it was five years ago and more valuable than it was 10 years ago, and it will only get better. We don't, you know, again, I'd rather buy everything as cheap as possible, of course.
Okay, I'm not going to, I don't want to overpay, but if great retail real estate is available for a transaction, I don't think we're doing our job or I'm doing my job right if I have a dramatically different view on because the 10-year is 5% today versus 4.3%, whatever it was, 90 days ago because the growth profile hasn't changed. The long-term, you know, value and NAV accretion doesn't change. Would I like to buy it cheaper? Obviously, 100%, but, you know, we're in this game for the long term, and, you know, we'll buy really, really good real estate, really, really good retail real estate, and we'll grow cash flow tremendously.
Are you, five years from now, do you think sports and athleisure will make up a bigger or smaller part of the mall?
Bigger, but I mean, it's.
A little bit.
A little, yeah. I mean, it's not going to be, I mean, you know, that's, I guess I should say, I'm not a fashion trend expert, okay? You know, I think that's part of it, but there's, I'd say there's a lot more entrants in the space, and they all want to open stores. They all want to open stores right sort of next to each other. I would, if I had to guess, I would say, yeah, there are probably those more entrants want to open more stores. But again, you know, in 5, 10, 15 years from now, we could all be wearing suits and tie again, you know, for, right? That could change, and then we'll pivot. But as long as the fashion trends remain the same, sure, it'll be more than it is today.
Are you happy with the current portfolio in terms of when you look at demographic changes or spending habits throughout the country? You know, you continue to focus and talk about owning the best centers.
Yep.
You know, is there a bottom 5% or 10% that you want to try to prune at some point, or they're generating enough cash flow or opportunity to reinvest in them?
Yeah, I mean, the reality is they are, I want to say all, but by and large, again, you have to, by definition, you have to rank things. Even though we love all our assets, we do not, you know, most of what one would say is at the bottom is unlevered. And so that is generating a bunch of free cash flow that allows us to reinvest into the assets that are not at the bottom. It is not really how we think about it, but sure. I think that, I think that, you know, is fair to say. But to the first part, you know, when we think about assets today and, you know, demographics, I think if you look at our outlet business, okay, you have sort of the powerhouse outlets, right?
The ones everybody, you know, nationally, internationally knows about, the Woodbury Common Premium Outlets, the Desert Hills Premium Outlets. You know, I will put Sawgrass in there even though it is not an outlet, same principle. Orlando, right? Both Orlando assets. Then you have this bucket of outlets that are great outlets, but that are effectively becoming the best shopping center in growing communities. And so those demographics are actually awesome. You look at the Charlotte Premium Outlets, the Denvers, Houston, Tampa, and the Panhandle and Silver Sands. I mean, you could, you know, right, I think that is enough to get the point. But these outlets that, you know, maybe when they were built were sort of, yeah, the 45-minute hour drive time, you know, from the, you know, from the core customer.
Now when you go there, all you see is housing. And generally speaking, it is cheaper, right, than the sort of the more established areas. So it is young families. It is the people that we want at our shopping centers. And so these, when we are leasing them as shopping centers, not as outlets. Now, a lot of outlet brands, 100%, we are adding beauty brands, you know, to these centers because that is how they are shopping. And so, you know, the demographics, you know, of an asset today or an asset 20 years ago might be very different than it is today. And so our job is sort of to lease it to where it is today, but also to where it is going into the future.
And so as a lot of these other, you know, malls that, or the, you know, that might have been owned by our peers or other people sort of go away, well, we are now making those, you know, the Allen Premium Outlets, the Tampa Premium Outlets are just great shopping center where you have the best collection of brands for that market. And some of the outlet brands see it too, and they are selling some full price, some outlet, some, they do not call it, they just sort of, the customer goes and says, "I love this brand. They have great product. This is the place. It is five minutes from my house. This is where I am going." And so our job is to meet the customer where they are. And, you know, and that is something we are focused on, you know, all the time.
I'm surprised at how small the FFO area is now of your overall value, I guess. Can you just spend a minute talking about how you view that strategically and then also the other international exposures that you've got?
Sure.
The Japanese guys. Does that become just so irrelevant that you get rid of it, or is it a gross area? How are you thinking about it?
Yeah, so Klépierre first, and I'm seeing Jean-Marc, I think, later today. We love the team. The team's great. Portfolio's great. They've done a tremendous job, the best balance sheet, you know, in that sector. You know, at the end of the day, it's an investment for us, okay? Which we're obviously on the board. We talk to Jean-Marc all the time. The team is great. We're earning a spread that would probably be very hard to replicate, you know, given sort of where they trade and their yield versus, you know, how we can finance in the EUR market. If there was something else to do that we liked, could we do it 100% and, you know, use those proceeds in a tax-efficient way? It's not on our radar, right? But never say never.
On the rest of our outlets, in particular Asia, so two things. One is we're continuing to expand and add new centers, outlet centers in Asia. We have great partners, Shinsegae in Korea, Mitsubishi Estate in Japan, Genting Group in Malaysia. Great partners. There's real opportunity. We're expanding in, you know, Gotemba Premium Outlets and Fukaya-Hanazono Premium Outlets, a new development in Daegu Premium Outlet in Korea, and Yeoju Premium Outlets in Korea expansion, Genting Highlands expansion. So we're actually putting money back. Now, all that money is generated there and it stays there. So we're not putting any new, you know, cash from, you know, from the U.S. there. But what it's allowed us to do is really create pretty incredible economics on these expansions. You know, so our cash equity yields could be 30% + on these expansions, which is obviously very good.
The other thing that Japan in particular does is, you know, we have $1 billion plus of assets there that are effectively, you know, de minimisly levered. That allows us to potentially access the yen market to offset some of the, you know, rate pressures here. It is something we are actively going to, you know, look at very, very seriously. I think it is, one is it is pretty, you know, there is no, there is definitely no other retail REIT. I think there is only one other REIT that can go borrow in yen, in euro, and obviously dollars. That is, I think, a real competitive advantage. But two is we talk to our new leasing team, talk to the Klépierre team, talk to the different teams on the ground in Korea and Japan all the time, okay? You know, the Korean beauty business is becoming significant.
We are getting, you know, the best relationships there, you know, at the senior levels in order to talk to them and now add those guys across our portfolio. It is a, you know, international is 10% of our business plus or minus. We like it where it is. Could it go up a little? Could it go down a little if we find stuff to do in the U.S.? For sure, but.
Those kind of returns you would not go, you know, really lean into?
For sure. I mean, it just, it is a function of, you know.
Is it a lean?
We try, right? We try. You know, things just take, as you can imagine, take time. But those are just stuff that is going to start in the next, you know, year, 18 months. You know, Kyoto, we are going to develop at some point in Japan an outlet there. It just takes time, unfortunately. But we, yeah, we like the international business. It is a huge competitive advantage. I think if you just look at the value of our international business, you know, if somebody properly valued it is pretty staggering compared to, you know, the other public retail real estate companies in the U.S. You know, we have a very big international business. It is probably not, we do not probably get enough credit for it. So yeah, we like it. We really like it.
Yeah. It has operating benefits and it has capital benefits to us. And we are, you know, we are harvesting those opportunities. And it really does power. You know, brands from Europe, brands from Asia, they are looking at the U.S. clearly because it is a place of growth. So we have these broader relationships than just in the U.S. So we can bring, you know, marry that together to create great economics for us.
I know we are almost out of time, but we had a bunch of incoming on CapEx, right? Tenant allowance. You talk about the Redev 1.1. You have talked about a pipeline, maybe $4 billion plus. I guess for the audience, can you just explain the buckets and just, you know, elaborate on some of the comments from the call on CapEx and the trends, like what you are seeing?
Yeah. TAs are down, okay? It is as simple as to say it. So, you know, right? If somebody runs the right math, the TA is down. Now we are doing more leasing, so TAs are up. I think that is good, right? We want to do more leasing. But TA per foot, TA payback, that is down. Again, if you run the right math, which Brian McDade is happy, Tom is happy to explain to people if they have questions on the right math. If you run the right math, TA per foot, however metric you want to look at it, is down. That is a fact, okay? I do not really know, I mean, I can understand why there is the narrative, but just not true. So that is part one. Part two is the development.
We are funding, if you just step back at the company, big picture, we are going to generate $5 billion of FFO this year, round numbers, pay $3.4 billion-$3.5 billion in dividends, and generate $1.5 billion-$1.6 billion of free cash flow. So we are going to generate $1.6 billion, and we will probably spend, round numbers, $500 million on TA, operating capital, renovations, et cetera, and $500 million on development. So that, A, that leads $500 million of excess, plus or minus. But B, that is a naturally deleveraging balance sheet because we are growing, right? Which I think is good. All those things are good. The development pipeline is, you know, we are going to fund it from free cash flow. Again, remember, if we have $1 billion today, plus $4 billion, that is $5 billion. We are going to generate $450 million of EBITDA from that.
That then goes and allows us to generate, you know, have incremental excess free cash flow to go buy back the stock, go do additional pipeline. I mean, the narrative is wrong. It is probably the simplest way to put it. But capital will go up as we do more leasing, absolutely. But as a percentage and as on a deal basis, et cetera, it goes down. We do more development. When we do development, we make more EBITDA. We make more EBITDA. We have more cash flow to then go to the bottom line that allows us to go do things with it, grow the dividend, grow the, you know, grow our buyback program, et cetera. And have a balance sheet that is less than 5 times levered. Again, it is all good. I mean, that is the simplest way to say it. It is all good.
We will just keep, we will keep doing it. Then you can call Brian McDade and Tom and they can walk through the math in great detail. But that is what the math is. The math is we are growing cash flow, we are growing NOI, and we got excess cash flow, and we are going to spend it creatively.
Thanks for that explanation, especially on the TA bit. How should we think about the structural versus 96% occupancy cyclical aspect of that? How far do you think it can go?
On occupancy?
Yeah. Not on occupancy, on TAs. How much lower do you think it can take?
It's, I mean, we have 40,000 leases, right? Something like that. It's each deal. I mean, it's a, you know, it's a function of competition. It's a function of the space. There are times where if we have great credit, we will give more money and make more rent, you know. So it's both, right? So we can give somebody more TA and get paid on it. If they have great credit, sometimes we will do it, sometimes we won't, but we do not mind that, right? We do not mind, you know, making the appropriate return on that credit. So it's, it all goes into the pot, right? Again, it's not like a unilateral decision. It's literally a 40,000 leases decision. The way I look at it is demand is really high.
When demand is really high, you know, we are able to, you know, structure deals with the tenants that work for us and work for them.
We are running out of time here. I have got a couple of rapid-fire questions for you. So one, if long-term rates stay higher for longer, which has the biggest impact on your sector? Is it higher refinancing costs, lower transaction activity, or less new supply?
Higher transaction costs. I mean, higher refinancing costs. I guess.
Number two, over the next three years, will third-party capital become a more important source of growth for public REITs than balance sheet capital? Yes or no?
I don't think so. Not for us, so I don't. For REITs overall, maybe, but not for us.
Yeah.
We focus on the sector. Data centers. We focus on us.
Yeah. So, okay, for the sector, yep.
And less, if it is us.
Okay. And number 3 is, next year, same story, NOI growth for the sector, higher, the same, or lower than this year?
You know what we're going to answer. Be less than ours.
I mean, we at least were consistent in our answer,
but I'm not going to change the answer.
Good ask that for everybody.
Overall goal, which we're proud of our track record over time, we got to keep that going. But we would like to get you the as good or better returns in the industrial space at lower risk. We try to think of, okay, how can we protect ourselves? The risk-wise, what we like about the, when you think of supply and demand, fast-growing markets just with another 100,000-150,000 people a year moving to Austin, Texas, to Orlando, to Phoenix, to Dallas, that pushes that demand. We want to be where people are moving, Nashville, Raleigh, those markets. But building last mile, there's usually when you think there's land on the edge of town, but by being last mile, everybody wants the good or service, especially since COVID, but no one wants the trucks tearing up their streets, starting in their neighborhood.
When you look at the GDP of the markets we're in because of that growth, it's rounded about 40% greater GDP growth. Our tenants are usually servicing the metro area or maybe even they're part of the metro area. Our demand is 40% greater than the U.S. average historically. Then by what we build, we could go to fast-growing markets, but if we're building big blocks on the edge of town, that's more susceptible. We want that demand with a little bit of supply hedge to it because it takes us a couple of years to put production in. With last mile, we do that, Stacey. Then other ways as we think about the risk, our Debt-to-EBITDA is right at the lowest in the sector. It's 3 times and falling.
Within our debt, it's fixed rate and it's laddered maturity. We want to have a safe balance sheet. We're geographically diversified. We value that our top 10 tenants are 6.5% of our revenues. That's probably half or a little below half our sector average. We want the balance sheet safe. We want the geographic, the tenant diversity. Then when we build, we'll build a business park. We'll build a campus as a developer, but we won't build the campus all at once. Again, what we'll do is kind of manage that risk. We'll build two buildings and maybe an eight-building park. As those lease up, I'll compare it to our peers where we could go build an 800,000-foot building on the edge of Charlotte, but you're hoping three or four people aren't doing that at the same time.
Where we'll build two buildings, and as those lease up, you know, we may give you a call and say, "Hey, I'm 50% leased. I've got prospects for the balance of the space. I want to get on the schedule for our own internal investment committee and build phase two, three, four of the park." We've used the analogy. It's like a retail store, whereas inventory runs low, we restock the shelves. By the same token, if inventory is not running low and I'm not, or we're not getting those calls from the field, then the calls are going the other way of, "Hey, what's going on with phase 3?
What can we do to get some leasing activity?" It's really the market is pulling new supply, whereas most of our peers, public and private, are pushing supply into the market of, "Hey, the last building worked, let's go build one interchange away," or where there's land readily available and you're just hoping 4 people aren't doing the same thing at about the same time. There's cheaper space than what we would have available. But the other thing of being in fast-growing cities, when you think about it, the traffic, if it's good or bad, traffic's terrible in all of our cities. It really makes that last mile more and more valuable because everybody wants the good or service delivered quickly.
You may have less expensive rents, but your delivery people or your customer service, you cannot afford to be stuck in traffic in Nashville and in Orlando and in Arizona at the wrong time of day if your air is out or whatever that good or service is. There is a value where we can push rents and kind of work from that. We like the way as we kind of think, whether it is what we own or how we build it or how we are financing it, what we are leaning into or the geographic, the tenant diversity. Then I will layer on kind of the last, and I will let Samir and others have a word. Our G&A is the lowest in our sector as a percentage of revenue.
We have purposely would rather put more of that. How do we get the returns out at the lowest? Again, we want to spend money in G&A where it is worthwhile, but we think we can do it with a, we probably have the simplest balance sheet in our sector as well and things like that. How do we get you the return without adding complexity, without adding risk? That is our goal. We constantly are tweaking the model without changing it over our, as someone kidded me at a conference recently, it is like, "I sat through your presentation, and it could have been eight years ago, and you were saying the same thing," which is probably true. It is like, look, it has kind of worked. We have had a good return, our good FFO growth.
Yeah, we change and we tweak what we build, but there is no need for us to get into medical office or whatever the next new thing or jump around and do what we do. Usually in our markets, inherently people get pushed to big blocks, whether it is the fees or the capital you are placing. I like where we fit on the playground. It is less competitive.
Maybe on the operational side, I mean, where do you stand today as it relates to the leasing pipeline? Talk about kind of demand that you are seeing out there in the market. Let us compare that to 2Q, for example.
Okay. Yeah. Maybe starting with Q2, that was a record quarter for us on leasing overall. We leased 3.9 million sq ft. That was about 1.5 million of development leasing through the Q2 period, which to put in perspective, that was more than what we leased in development all last year. If you heard us talk about the business in 2025, we talked a lot about inconsistencies where we'd see a really good quarter followed by a weaker quarter. What we've now seen really starting in Q4 of last year is some consistent demand. That consistent demand has really been a big driver for us, both on the development side where we've through Q3 in our update we provide the other day, we've leased 280,000 square feet of additional development leasing. That's allowed us to increase our development starts throughout the year.
We're now at $325 million. It feels like there's probably more upward pressure on that number as we sit today. Our occupancy numbers have also outpaced in July and August. We're sitting right at 96.1%, which is ahead of our plan that we had in Q1. The demand trends seem to be there. We're seeing that in a lot of different areas. We've talked a lot today about data center-related uses, if you haven't heard about it, but data centers are hot. The nice thing is that we're a benefit of that because a lot of the users that need a service data centers, be it HVAC, electrical, or whatnot, have to have warehouse space to provide those services. So we're enjoying the increased demand in data center-related uses.
All the other trends that we've been seeing over the years, being advanced manufacturing, be it the e-commerce, all those tailwinds are still feeding us beyond just the general GDP growth of the metropolitan areas that we service. So I feel like we're in a really good position in all the markets that we serve to continue to provide good growth in our assets, good same-store growth, as well as what feels like an improving and more sustainable development business going into the rest of the year and into next year.
How sustainable is that data center demand, you think? Maybe a second part to that would be how big can that become within sort of your portfolio?
That's a great question. We've been studying it a lot and trying to understand it, but it does definitely feel very durable. As I mentioned, the users that we're seeing are supporting the data center. It feels like as long as the data centers are there, they're going to have a need for our space. How big can it get?
It's not just like initial setup as they move the chips in, like maintenance.
Maintenance, HVAC equipment, the power generators, they need backup and support and maintenance. You know, the racking systems, we have one group that took some space from us in Houston that supports the racks. If you have an issue with a particular rack, they may send it to this facility, have it serviced or spot checked and sent back. Electrical components, you know, there's all different elements of the data center that I didn't initially appreciate even a year ago that we're now seeing that's fueling the need for all this space.
Doing that on site.
Not in the data center. No. What we are seeing is HVAC is kind of the easiest example. There is, we have HVAC companies that have a commercial business. With the data centers that are now growing, that has become a bigger part of their business. They have a core business they have always had, and it is just now expanding more because of the data center. We are a benefit of that because we are their existing landlord. Then they come to us and say, "Hey, we need some additional space. What can you do?" That is where, you know, our development pipeline and platform helps provide that growth for them.
I think the other thing, I will agree with Reid. I will add, just as we have studied it, and it is not throughout our portfolio, like we are not seeing this demand in Florida or California, but when we look from, say, the Carolinas, Atlanta, Dallas, Phoenix, it feels like that is where the data centers have been delivered and we have those suppliers. When we looked at what has been delivered versus projected, what is coming in the next five years, it was a multiple. It surprised me. Given as much as we have spent on data centers, it is call it four or five times more capacity coming that Dallas is projected to be the same or greater than Northern Virginia.
As Phoenix, Atlanta, Charlotte, all these get built out, that is maybe Samir, where you touched on of like, look, there is a lot of runway left on this because maybe the supply chain has been built out in Northern Virginia, but it really has not. I know recent lease we signed in Arizona in the last two or three weeks, part of their thinking was we have adjacent land, we were helped and that they wanted to be in our project and that we have got other buildings and land in the area. Their goal is to outgrow their space as soon as they can. I hope they are right too on that.
We have been looking at a lot of different studies from different groups, but one of the most recent ones I read was from Green Street, and they quoted that for every GW, they anticipate there is a need for 2 million-3 million sq ft of supporting warehouse space. If you feel like we are in the early innings of all this, which it feels that way, there should be a long growth rate and trend for the need for this type of warehouse space and the type of users we have been supporting here this last few quarters.
It didn't seem like there's any changes as it relates to the requirements or the lease terms that this category sort of has, right?
That's a great point. We haven't, we've been attracting all this data center-related demand, but we haven't changed anything about our strategy. We haven't changed the location of our buildings, our investments, or the building configurations. Even when these users come in, the requirements are pretty much the exact same from what our general users are using. If I gave you the term sheets of a deal between a data center-related use and maybe one of our standard tenants, you wouldn't be able to tell the difference between term or our TI amounts or any other special requirements.
What we like about that too is long-term investor, long-term developer, owner, over the years, we never know what trends in the economy are going to be happening in another 5 or 10 years, but we have generic and optionality on our buildings that we'll still be able to track these future uses if, you know, the data center users decide to move on or whatnot.
What about given all this positivity and momentum and demand, what are you seeing in market rents? Talk about, I don't know, talk about nationally and some of your best markets, what you're seeing and maybe some of your relatively, you know, kind of weaker markets.
Yeah. So for our product type, you know, I think it's important to understand, you know, the small bay, multi-tenant. That overall has been a tighter market over the years. So I think we've probably sounded more bullish on rent growth and be able to hold rents in the weaker markets than some of our peers. So throughout this year, it feels like we've been from a rent growth perspective on just the market standpoint, probably a couple bps above inflation. I think as you look forward, I think the trend is going to be positive on that. One of the things that we're anticipating is higher construction costs as we go into 2027 and beyond. That's being driven by several factors. Obviously, you have higher fuel costs, be it diesel or gasoline.
We're also hearing from our GCs that steel is increasing, both the lead time and the cost of steel as some of these large manufacturing facilities are gobbling up a lot of the steel capacity in the country. Then also I think there's going to be a higher amount of supply, mostly on the big box side. So all that equates to higher construction costs. Then you layer on that there's going to be higher interest rate carry. That's going to make the cost of projects go up, which then should have the effects of having to push rental rate to justify new development. So I think the trends for rent growth are positive for our sector as we finish out 2026 and really looking into the future.
Open up to the audience.
Maybe Marshall, going back to some of your opening comments about having parks where you build one building and then the next. Do you have a sense of across the EGP portfolio, you know, how much runway there is for development based on existing parks where you still have capacity for more buildings on those parks?
Yeah, I'm trying to get some. It is in our supplement right behind. I will not grab it, but I want to say, and I am getting away from parks, but we have capacity at the end of 2Q for about 1 million sq ft more to build. That would not all be parks, but a majority of that is. Then in our update would be a new park, but we bought really something Reid worked on for a long time. I think people underestimate how long it takes to get these land sites ready and approved, but 100 acres in Dallas. Then what was it in Florida? We bought 30 acres and it was maybe 12 parcels and 10 family members where the guy that bought it said, and they did not all speak to each other or get along.
Sometimes I regret making that first call to a family member, but that allows to grow that from a three-building park to a five building. It is right where, you know Tampa very well, it is East Tampa where I-4 and I-75 connect. So we are on both sides of that. So great visibility access, but it is just, it is all difficult. Yeah, so we have got a lot of runway and it is something, you know, that is what we have got on the balance sheet. Then we are also working, especially where we are seeing this demand, other land, and we are in due diligence in Atlanta and Phoenix and a number of markets. I always think of what you see in our supplements, mentally to me, it is almost like the iceberg. What you are seeing is what we already own.
Then there is a bunch of other sites that, depending how zoning and permitting and demand, whether we close that or not. But we try to look at that on really a market by market or submarket by submarket so that you have got that capacity because I always go back, I can think of one case in Jacksonville where we had a tenant, we did not have the land and they needed more space. If we cannot, I would rather cannibalize our own rents than have someone else. That is one where we lost a good tenant. They had just outgrown our space.
We did not have the building or the land, but we would rather, as I may have mentioned, about a third of our development leasing is existing tenants moving around from within our park or around the corner. So that is why we would like to cluster our assets. Again, if somebody is shrinking, you can try to move them around and just keep moving the Rubik's Cube to find a home for them. Everybody thinks they are going to expand on the way in. Not everybody does, but it is nice to say, hey, we have got room for you. We have been fortunate in industrial that by the time you have outgrown your space in building three and we build building eight for you, we are coming in mid-lease term. So we are kind of captive.
It is hard for you to go to another landowner or another landlord and the rents you signed up for two or three years ago. So we can backfill you at a higher rate. We see, we know when that new building's going to be delivered and hopefully the team can get the new tenant at a higher rate in place to kind of backfill and keep turning that way.
How should we think about cash leasing spreads? I mean, it feels like that continues to normalize and we're kind of in this 19%, 20% level. Where does that sort of settle in, do you think, in a normalized sort of environment?
Yeah, I mean, it's been somewhat of a slow deflating balloon on the cash spreads, but it does feel, like I mentioned earlier, that rent growth should start reaccelerating. As we kind of look into the future, that balloon may deflate a little bit slower than it has been, but this year it feels fairly sustainable at that kind of 20% level. If you look at the Q3 update we provided, we were a little north of that on a cash basis and almost 40% on a straight line basis on the releasing spreads. The geographic diversity that we have, that we talked about a little bit, it's been interesting because some of the markets like in California, those releasing spreads have been slower to date where historically that's, you know, really fueled the growth.
Whereas a market like Houston kind of reversed and flipped. Houston now is really above the company average on releasing spreads. We like the diversity geographically because we're never going to guess or one market's never going to be the hottest forever, but if we're enough of the fast-growing markets, we're going to pick right more times than we'll pick wrong.
Are you seeing? Go ahead.
I was going to tell you, I was just going to correct myself. Andrew, when you asked me, and this is why I don't rely on my memory, it's 1,000 acres. I said it may have 1,000 acres and 11 million sq ft. You think we're about 66 million square feet all in. That's a, I promise we won't build all that at once, but we'll build it as fast as the market can absorb it. That was wildly all.
I mean, I know you don't have a lot of exposure to SoCal. Maybe it's, you know, 10% - 12%, something like that. Like what are you seeing there? I mean, are you seeing the market improve at this point? I'm just curious.
Yeah, yeah. It definitely feels like there are some green shoots in California. There's some submarkets that are feeling it sooner than others. You know, it's been a market where, you know, there was in the L.A. area, there was, you know, 12 quarters of negative absorption and that now has trended positive the last couple of quarters. So, you know, is that a new trend? It kind of feels like it. The aerospace, advanced manufacturing users feel like that's powering some of that market as well as the big box space. Then kind of everything in between seems like it's going to start filling in. I think the supply picture is going to be even more constrained in California because some of the regulations that they've imparted.
As long as the growth can pick back up and be positive, I think California could look better in the next couple of years than it has the last several.
You guys talk to us a bit about where you're seeing the data center demand in your portfolio and can you quantify how much leasing is coming from that? Just any sort of color you can give us on what you're seeing.
Yeah, it's probably the main markets where to date have been Atlanta, Texas, and that's really Houston, Austin, Dallas, San Antonio even some. Then Phoenix. So those, and then it's Charlotte is what we hear is coming. So I think it's about to happen there. We're close to a, knock on wood, a pre-lease opportunity in the Carolinas where an existing customer would take another building. So again, that's kind of what's helped push pressure from start. So it, and it's been kind of that ongoing service of data centers. So it feels like it's.
Some of that development leasing is also data center related.
Yeah, it's about a quarter to the first half of the year is about a quarter of our development leasing was somebody cabling, racking, cooling equipment, something with a data center.
What about the transaction market? Like what are you seeing out there? Obviously, rate tab moved up here. I mean, give us an idea of kind of what you're seeing.
Yeah, so from an acquisition standpoint, if you heard us speak earlier in the year, that was a piece that we were thinking maybe we would not make our budget because it felt a lot more competitive than we anticipated. But it really feels like the last 45 days, maybe we've seen a bump up in cap rates. We've been chasing a lot of deals. There's been some good opportunities in the market that we've been pursuing. And it seems like we're winning more now than we're losing. So we're not pursuing them more aggressively, but our offers are starting to stick. So that gives us the bullishness that we may have the opportunity to outperform our budget now. So don't call us manic, but sometimes we got to play with the market provides us.
Right now it seems like there's some good opportunities where we have an attractive cost of capital to continue to grow through the acquisition standpoint. And it's somewhat unique for us to have both the acquisition window open and the development window open. So the acquisition window will close at some point, but we'll continue to funnel and grow through development. So if we can't buy it, we'll build it. But right now it feels pretty good for where we stand.
Where are cap rates today? I know you said it ticked up a little bit. Just give us a general idea.
Yeah, on the cash side, for stabilized kind of app market, it feels like you are kind of in that 5.25%-5.5% range. That may have jumped up kind of 10 - 20 bps in the last 45 days, as I stated. It really kind of depends on, there is some markets that are tighter than that. There is some markets, depending on the WALT, you know, some of these deals that have longer WALT are more interest rate sensitive. I think that is the feel, the last bit is that the rise in the 10 years kind of pushed cap rates up some.
How are you thinking about the trade-off between acquisition and development opportunities? Can you just talk about maybe the risk-adjusted incremental return you need on, you know, developments versus acquisitions?
Yeah, we naturally lean into the development more. That is where we feel like we create the highest risk-adjusted returns for our shareholders. To date, we have been achieving right around a 7.5% yield on cost on a straight line basis for our developments. That is what we have rolled into the portfolio as well as kind of what is under lease up. That feels fairly sticky, if not maybe a little bit of upward pressure on some recent deals that we have been pursuing and looking at. On the acquisition side, that is going to always be for us more opportunistic. Sometimes it will be a strategic buy where it is close to some existing product or, you know, portfolio that we have and at the right pricing.
I think what makes us really good acquirers and investors on the acquisition side is that we are a seasoned developer. We can go and tell you, hey, this building should, if it was to be rebuilt today, should cost, you know, what per square foot. When the brokers come out and say, hey, this is the guidance, this is the pricing, we can quickly say, hey, that feels like a good price or it doesn't on a per square foot basis. Then knowing as a developer what some markets are good, also, you know, what attributes of a building are important to release, you know, we can quickly say this is something we should pursue or not pursue.
When we're buying something, we're buying it with conviction that we know it's a good building, it's going to perform in the long term at a good price.
How should we think about leverage? Because it's, you know, you're kind of, I mean, I don't even think it's 3 x, right? It's up 3 x. Like how are you thinking about your optimal leverage?
Yes. We certainly appreciate where our balance sheet stands today with the dry powder that we have, so to speak, to be able to take advantage of the opportunities that we see from development and acquisitions. We're glad. I mean, this was a purpose-built balance sheet. We have intentionally lowered our leverage so that we would be able to take advantage of investment opportunities as they arise and fit with our strategy. We didn't necessarily have the goal of reaching 3 x Debt-to-EBITDA, but we're comfortable there. We would be comfortable increasing leverage. I mean, ideally in the, say, 4.5 range and below five would be our long-term, you know, range where we would be comfortable keeping leverage. We certainly have a lot of capacity to issue debt when interest rates and those investment opportunities are to align.
But for now, we're continuing to issue equity via our ATM program. As we recently announced, we have about $320 million available in equity forward agreements that we have from about 12 - 18 months to draw those down. So that provides us with flexibility based on the timing of when the acquisition and development opportunities arise. So we feel good about our leverage where we are. Don't necessarily need to be as low levered as we are, but comfortable there and certainly comfortable increasing leverage to that 4.5 Debt-to-EBITDA for the longer term.
You mentioned your strategy is not changing with the data center demand, but do you see that shifting as you have more of those data center tenants coming into play?
Yeah, I'm trying to make sure I'm answering correctly. I wouldn't say it's not changing what we're building or kind of where we're building, but where it probably does make us a little more bullish on land opportunities and in that handful of markets where we're looking. We've always liked Dallas. We've been in Phoenix since the mid-1990s. We like Atlanta, Charlotte. We've been at a long time, but Houston, it probably makes us lean in to kind of go, all right, we've got our traditional users and now we've got these data center suppliers coming on the heels of that. So it makes you feel like, okay, this demand is going to just be greater in these. You've got population growth, you've got e-commerce, kind of that steady penetration every year. You've gotten those same markets are the ones that also have the advanced manufacturing.
We're near the Intel plant in Southeast Phoenix. So we've got actually Intel and some suppliers to Phoenix. We're near the Texas Instruments plant. We've got Tesla suppliers in Dallas. So it just seems like that, look, as many tailwinds as we can grab, we're happy to have them. And when you see those dots, you want to connect them and just try to get out ahead of it with a catcher's net between population, e-commerce, data center demand. We've got what the LG battery plant we're near in Mesa too and some other things like that or Phoenix area.
Any other questions? I know I've got a couple of rapid fire. I think you probably know these.
I've got slow answers, but yeah.
If long-term rates stay higher for longer, which has the biggest impact on your sector? Higher refinancing costs, lower transaction activity, or less new supply?
I think less new supply.
Second one, over the next 3 years, will third-party capital become a more important source of growth for public REITs than balance sheet capital? Yes or no?
Yes.
Finally, will the sector 2027 same strength, NOI growth higher, same, or lower than 2026?
Higher.
Perfect. Thanks, everybody.
Thank you.
Thank you.