Bullish Simon Boosts Outlook

The Simon Property Group, continuing to transform several of its malls and build up its retail holdings, reported a healthy first quarter, encouraging the nation’s largest shopping center owner to raise its outlook for the year.

Net income rose to $445.9 million, or $1.36 a common share, in the quarter ended March 31, from $437.6 million, or $1.35 a share, in the year-ago period.

Revenues slipped a bit to $1.24 billion from $1.35 billion a year ago.

“We are very pleased with our first-quarter results,” said David Simon, chairman, chief executive officer and president. “Our business has substantially improved after addressing the impacts from the COVID-19 pandemic including significantly restrictive governmental orders as evidenced by our improved profitability and cash-flow growth, increasing shopper traffic, increasing retailer sales and leasing momentum across our portfolio. We are also seeing similar results in the Taubman Realty Group portfolio and are encouraged by our collective progress in increasing its profitability. Today we are increasing our full-year 2021 guidance.”

In December, Simon completed its acquisition of an 80 percent ownership interest in Taubman.

David Simon
Courtesy Photo

Funds from operations, or FFO, were $934 million, or $2.48 a diluted share for the first quarter.

Domestic and international properties net operating income, or NOI, combined, declined 8.4 percent compared to the prior-year period as a direct result of the pandemic. Portfolio NOI, which includes NOI from domestic properties, international properties and NOI from the company’s investment in Taubman Realty Group, increased 4 percent compared to the prior-year period.

Occupancy was 90.8 percent at the end of the first quarter, down from 94 percent a year ago. Base minimum rent per square foot was $56.07, an increase of 0.6 percent from $55.76 a year ago.

Simon has been active transforming several of its shopping centers with different services, end-uses and experiences, such as gyms, clinics, groceries and residences, to be more relevant and less dependent on traditional retailing. For example, at the Northgate center in Seattle, Simon is adding the National Hockey League’s Seattle Kraken corporate offices and practice and training facility. At Phipps Plaza in Atlanta, there will be a Nobu Hotel and Restaurant, Citizens food hall, Life Time athletic club and Life Time Work.

In addition, construction continues on redevelopments at the North Shore and Burlington malls, both in the Boston area; at the West Town Mall in Knoxville, Tenn., and the Tacoma Mall in Washington.

In the U.K., the West Midlands Designer Outlet opened on April 12 upon the lifting of COVID-19 restrictions, which delayed the initial opening date. The open-air center has 197,000 square feet; Simon owns a 23 percent interest in the center.

Last week, Simon and Authentic Brands Group, through their SPARC partnership, agreed to buy Eddie Bauer, adding the outdoor gear and apparel retailer to SPARC’s portfolio of brands that includes J.C. Penney Co. Inc., Aéropostale, Lucky Brand, Nautica, Forever 21 and Brooks Brothers.

“Retail is better than expected in America. It’s off to a pretty good start,” Simon said during Monday’s conference call on the first quarter.

He said the SPARC portfolio is “doing fantastic. Eddie Bauer will be really beneficial” and will “follow the same game plan with all the other brands we bought. It is essentially a no-brainer.”

Forever 21 and Aéropostale led the SPARC portfolio in terms of sales and gross margins in March and April, Simon said.

He cited also American Eagle Outfitters, Prada, Gucci, Louis Vuitton, Levi’s, Rue 21, Marc Jacobs, Bottega Veneta, and Saint Laurent as performing well, though he said the retail uptick is “across the board.”

Simon made the case for brick-and-mortar being “unquestionably better for the environment than e-commerce…People cared less because of COVID-19. Really, the focus for us in the future is to explain the merits of physical stores and what they mean to the environment versus e-commerce. Between the packaging and transportation, I could go on and on about the carbon footprint of e-commerce versus physical retail.”

Simon also railed against the tax structure. “There is no reason that retail real estate should be taxed 10 times what warehouse and distribution facilities are taxed — 10 times.”

On leasing momentum, he said, “Keeping my fingers crossed, we are actually seeing really good demand across the board…restaurant demand is at a very high level. Some strong retailers are growing,” he said, citing American Eagle and Urban Outfitters. Crocs, he added, “was hot a decade ago. People thought it lost its mojo. Now it’s killing it.

“Suburbia is hot. Suburbia is the place to be. We just happen to have a lot of great well-located suburban real estate. I don’t think this is a short-term scenario.…The Taubman portfolio is great suburban real estate more or less.”

On “revenge shopping,” which is a reaction to being cooped up due to COVID-19, California and parts of New York haven’t seen it yet, whereas Florida has, Simon said. He also said, “People traveling globally probably won’t happen much until the end of this year, certainly in 2022.”

J.C. Penney he said is past the stabilization and capital preservation modes. “We have accomplished those already…We are bringing new merchandise brands to it, some of the other brands are nervous.” As for moving Penney’s to growth in the future, “We are not there yet. We’ve got lots of ideas, but the first goal is to rightsize the company, strengthen financial capabilities and repair any vendor relationships and stabilize the morale.…The plan is above where we thought it would be.” In 2022, or late 2021, ABG brands will start selling at Penney’s, Simon said.

On occupancy levels, Simon said, “We expect a reasonable improvement on 2020 versus 2021. We’re not going to get back to 2019 levels in 2021, more likely 2022 or ‘23.”

Simon did say there are still some “difficult relationships and negotiations that we are dealing with — I won’t name names…If they are not paying what we think is fair, we’d just rather sit on empty space. We are not always going to get it right but we’re trying to do fair deals. To the extent it’s too one-sided, we just sit on the space.”

By: davidmoin