Despite the significant challenges that plagued retail last year, the largest mall owner in the U.S. continues to thrive, and its CEO predicts a better 12 months ahead.
In its earnings release Wednesday, Simon Property Group reported net income for the fourth quarter ended Dec. 31 of $571.1 million, or $1.84 per diluted share. That’s compared to $394.4 million, or $1.26 per diluted share during the prior year period.
The property group closed out the year with a 95.6% occupancy rate, which reflects store closures and new development. It saw base minimum rents increase by 2.9% in the quarter.
Chairman and CEO David Simon credits the company’s performance to its tenant mix, focus on property management and disciplined investments.
Though his peers are closing deals like the $16 billion Uniball/Rodamco acquisition of Westfield Malls, Simon has no intentions in participating in the M&A boom that’s anticipated for 2018.
“I don’t beat to that drum and I don’t think we need to and in fact I think most people are catching up with what we’ve already done,” he said, during the company’s earnings call.
Looking ahead, he’s optimistic about the coming year.
“It’s hard to predict, but I would think that [store closures are] going to be significantly less than 2017 and that’s the good news,” he said, adding that he’s observed some retailers that were “a little sketchy last year seemed to stabilize their business a bit more.”
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Richard Sokolov, president and COO of Simon Property Group, agreed. “It is clearly a firmer environment,” he said. “If you looked at all of the comments that the tenants had coming out of ICR [retail investment conference], I think all of them basically were saying that we have made progress getting our portfolios rightsized…We view ’18 as hopefully going to be a less debilitating year in terms of reorgs and bankruptcies and we’re doing a lot of leasing.”
Part of the positive outlook is based on the exact thing that’s fed the malls-are-dying-storyline over the last few months: retailers vacating spaces.
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Whether through bankruptcies or rightsizing, Simon Property saw 1.2 million square feet of space return in 2017. But Simon isn’t worried. Quite the opposite.
“I can’t tell you how excited we are to get these spaces back. Where the media likes to make it as the beginning of the end, we think it’s the rebirth,” Simon said, referring specifically to the 12 Sears locations the company acquired or regained control of in the fourth quarter. Simon plans to fill the space with a variety of tenants including apparel, restaurants, health clubs and theaters, while others will be transformed into mixed use spaces.
“In every instance, there is one thing each of these projects [have] in common and that is when we’re done, our project is going to be substantially stronger, higher NOI [net operating income], higher total sales and more attractive marketplace serving its trade area,” Sokolov said.
Simon said the story is much the same for the balance of the space that has returned.
“We’ve already brought back online almost 50 percent of it, and we’re making really good progress on the balance,” he said. “And the tenants that are coming in are frankly great productive growing tenants that are going to be more productive than the tenants that closed and they’re paying higher rents.”