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Simon Property Group CEO: The Apocalypse Narrative is All Wrong

David Simon is not a fan of the retail apocalypse narrative that’s been hogging the headlines lately.

And as CEO and chairman of arguably the top mall operator in the country, you can understand why. Not to mention the fact that despite the record number of store closures this year, Simon Property Group enjoys a 95.2% occupancy rate across its mall and premium outlet divisions.

In the company’s earnings, out Tuesday, Simon reported a net income of $859.7 million for the first six months of the year, down from $926.4 million in the prior year period. Total net operating income for the first half was up 5.3%. The company also raised its full-year guidance to $6.20 to $6.28 per diluted share, up 4 cents from the previous guidance issued in April.

Though Simon is reading—and living—the same news stories everyone else is, he’s still bullish on the mall and what he sees as its singular advantage. “[Tenants] want to congregate in the best location where the traffic is, and by and large, in communities throughout the country, that’s the mall,” he said during the company’s earnings call.

That said, even for a company that operates better properties, things have been challenging, he said, but not impossible. “It’s not a very fun environment. We’re working extra hard and pounding the pavement more than ever. We have to go get deals and restructure some,” he said. “Do you need to be a touch more conservative or hoard a touch more capital and be more flexible with retailers? Of course, but we don’t see the end of our business,” Simon said.

The company’s base minimum rents per square foot, which were up 3.3% to $52.10, seem to support that claim. Further, reported retailer sales for malls and premium outlets was $618 compared to $607, a 1.8% increase.

The performance of its properties is one reason why there’s an influx of e-commerce pureplays looking to put down physical roots in Simon malls. Simon said online businesses, including Untuckit, Warby Parker, Bonobos, Eloquii and Fabletics, now occupy 280 stores. Richard Sokolov, president and chief operating officer, said that each has raised capital specifically for stores. “I believe that they’ve recognized a well-positioned fleet of stores is necessary and optimal for them to grow their businesses,” he said.

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The recent spate of department store closures will actually benefit Simon since it will allow the company to buy some of that real estate and use it toward accommodating businesses like this. “Our job is to be able to manufacture space,” Sokolov explained. “And in our great properties, getting back space enables us to drive our NOI [net operating income] by bringing in more tenants and raising revenue and raising productivity.”

The online guys are joining new brick-and-mortar businesses and those that historically weren’t located in malls, including Japanese department store Muji, body products chain Rituals and Juice Generation health food shops. What you don’t see as much of is apparel, and that’s by design.

“Apparel now is down below 40 percent of our GLA [gross leasable area],” Sokolov said. “When you look at our new deals, we’re having almost 20 percent less in terms of allocation to the apparel and shoes, and  food services is going up substantially.”

[Read more about how retailers are shuttering doors: Store Closures Rampant? Maybe. Random? Definitely Not.]

The pivot away from apparel is just one way in which the company began to react to what it saw as trouble up ahead.

“In ’15, I saw the handwriting on the wall for some of these leveraged retailers. You can’t have too much leverage in any business, especially in retail,” he said. For any retailer carrying that much debt, good business practices go out the window as they attempt to service it. Simon said this means investment in stores, inventory, service and technology all go by the wayside. “It’s a self-fulfilling prophesy.”

But alarming as it may be to see the list of distressed and bankrupt retailers, Sokolov said things have been worse.

“Payless, Rue21, Gymboree are all restructuring. They’re converting their debt to equity, and they’re going to emerge [as] very substantial retailers with much better balance sheets,” he said. “You compare that to ’09, the creditors did not have the confidence in the sector, and they were taking a liquidation bid instead of restructuring. That seems to be missed in all the other conversation out there.”

With positive cash flows, these retailers will be positioned to be productive tenants again. In the meantime, Simon Property and other mall operators are fielding requests for lease restructurings, which the company says it considers “case by case.”

At the same time, Simon is offering shorter lease terms to some, which the company explained, is actually an optimistic move. “It makes sense to do short term deals if you feel the environment is going to get better,” he said. “I think our environment is going to get better. That’s my instinct.”