In a Nutshell: The mall operator, a real estate investment trust (REIT), reported third quarter earnings results topping Wall Street estimates. It reported $8.6 billion in liquidity at the end of Q3, and refinanced 16 property mortgages from January through September. It also has a “significant number of leases” in its pipeline for a new lease opening rate up 10 percent since last year and average leases lasting seven years.
“We have yet to see any pullback in opening new stores or renewals,” the CEO said. “Where [retailers are] seeing most of the pressure is in the e-commerce business, so the flight toward bricks-and-mortar is real. It’s going to be sustained.”
The executive stressed that retailers interested in growth are “going to open stores, and it’s that simple because the returns on e-commerce just aren’t quite what everybody talks about.” Retailers will put money into stores because they provide the “highest return on investment,” which the mall operator has observed through its investments in JCPenney and partnerships with SPARC and Rue Gilt Groupe. “It’s been a difficult year for e-commerce, and bricks is where the action is,” he said.
Despite today’s “concerning” macro climate, the CEO has “unbelievable confidence going into the next few years” and warned Wall Street investors not to “underestimate physical retail.” Even if there’s a hiccup this holiday, he sees demand for new deals continuing apace. Though no one really wants a recession, a downturn would offer an upside in cutting new development construction costs, he said.
Simon now expects occupancy and cash flow to reach pre-Covid levels next year. Occupancy across its U.S. malls and premium outlets was 94.5 percent at Sept. 30, 2022, up 1.7 percent from 92.8 percent a year ago. The base minimum rent per square foot was $54.80, up 1.7 percent from $53.91 a year ago.
Net Sales: Total revenue rose 1.5 percent to $1.32 billion from $1.30 billion. Revenue included a 0.6 percent gain in leasing income to $1.22 billion.
For the nine months, total revenue rose 2.7 percent to $3.89 billion from $3.79 billion, which included a 3.0 percent gain in leasing income to $3.62 billion.
Earnings: Net income fell 20.7 percent to $539.0 million, or $1.65 a diluted share, from $679.9 million, or $2.07, a year ago. Comparable Funds From Operations (FFO) rose 0.9 percent to $1.11 billion, or $2.97 a diluted share, from $1.10 billion, or $2.92, a year ago. FFO is a metric used by REITS to show cash flow from operations and is considered a good reflection of the company’s financial performance.
Despite the slip in profits, SPG outperformed Wall Street’s consensus expectations of adjusted diluted EPS at $1.44 on revenue of $1.23 billion.
For the nine months, net income decreased 16.1 percent to $1.46 billion, or $4.46 a diluted share, versus $1.74 billion, or $5.40, a year ago.
SPG raised Fiscal 2022 guidance, with net income in the range of $6.16 to $6.21 a diluted share and comparable FFO in the range of $11.83 to $11.88 for the year ending Dec. 31, 2022. That’s up from $5.93 to $6.00 a diluted share and Comparable FFO between $11.70 and $11.77 that was expected in August when SPG reported on second quarter results.
CEO’s Take: “Many have tried to kill off physical retail real estate, and in particular in closed malls,” he said, adding that when stores were closed during Covid, “naysayers said physical retail was gone forever. However, brick-and-mortar is strong, brick-and-mortar retailer is strong, and e-commerce is flatlining.”