Simon Property Group is still trying to battle back from the nationwide closures of its properties during the Covid-19 pandemic, with third-quarter revenues falling 25 percent to $1.06 billion and total funds from operations reaching $2.05 a share, well below the $2.28 per share expected by Wall Street analysts polled by FactSet.
Regardless of the mall REIT’s quarterly results, all eyes have been on Simon’s finally approved acquisition of bankrupt J.C. Penney. In an earnings call on Monday, CEO David Simon pulled back the curtain on the real estate investment trust’s new co-ownership of the bankrupt department store, and what this may mean for the merchandising mix at its nearly 600 remaining stores.
In a Nutshell: Simon confirmed that Authentic Brands Group, which partners with Simon Property Group under the venture Sparc and was previously reported as a possible bidder for J.C. Penney, will be joining the shopping center operator alongside Brookfield Property Partners in their joint acquisition of the retailer.
ABG will invest at the same price as Simon and Brookfield, but will not be an equal partner, according to Simon. Simon is currently looking at ABG’s collection of brands to determine which brands could be introduced in J.C. Penney stores.
“We’re going through the vendor matrix now,” Simon said during the call. “Eventually, I think Penney will end up distributing those kinds of brands that Authentic Brands Group controls, in the J.C. Penney department store. So it will be a win-win for everybody.”
As an example, Simon named Juicy Couture—a women’s apparel brand that is controlled by ABG but one which J.C. Penney does not currently sell—as a label with “store potential,” but did not confirm which brands would ultimately feature on the retailer’s racks and shelves.
“We do think that with the combination of our relationships with the direct-to-consumer crowd as well as all the brands that either we control or that ABG does, those products will find a home in Penney,” Simon said.
Simon and ABG already teamed up to acquire Brooks Brothers and denim retailer Lucky Brand Dungarees in August. Previously, the Sparc venture bought two teen retail chains out of bankruptcy: Forever 21 in February and Aeropostale in 2016.
All of Simon’s U.S. retail properties are currently open expect for its Cielo Vista mall in El Paso, Texas, which was forced to close again amid rising local Covid-19 cases. As of Nov. 6, Simon has collected 72 percent of its net billed rents from its U.S. retail portfolio for the second quarter, and has realized higher net billed rent collections for the third quarter, with a collection rate of 85 percent.
Simon also said that shopper traffic and total sales volume with the company’s properties continue to improve with each sequential month, with third quarter sales at its shopping centers dropping 10 percent compared to the third quarter of 2019.
Occupancy was 91.4 percent as of Sept. 30, down from 92.9 percent as of June 30 and down from 94.7 at this point last year. Simon said the future of the occupancy rate would depend largely on potential retail bankruptcies in the coming months.
Base minimum rent per square foot was $56.13, an increase of 2.9 percent year over year.
As of Sept. 30, Simon had more than $9.7 billion of liquidity consisting of $1.5 billion of cash on hand, including its share of joint venture cash, and $8.2 billion of available capacity under its revolving credit facilities and term loan.
Simon’s liquidity has put it in much better than many other shopping center operators that were ravaged by the store closures of the pandemic. Earlier this month, Pennsylvania Real Estate Investment Trust and CBL Properties became the first and second mall operators, respectively, to restructure operations under voluntary Chapter 11 bankruptcy filings. REIT rival Macerich, meanwhile, is seeing signs of recovery.
Net Sales: Net revenues for the third quarter reached $1.06 billion, down 25 percent from last year’s total of $1.42 billion and also missing the $1.16 billion consensus expected by Wall Street analysts.
Net Earnings: Net income for the quarter was $145.9 million, or 48 cents per diluted share, a significant dip compared to $544.3 million, or $1.77 per diluted share in 2019. The current year period includes a non-cash impairment charge of $91.3 million, or 26 cents per diluted share, related to the company’s interests in four unconsolidated joint ventures.
Simon revealed that its portfolio net operating income for the period declined 22.4 percent to —attributed in part to reduced revenues from agreed-upon rent abatements with some of its retail tenants and lower sales-based rents, which were partially offset by cost-reduction initiatives.
The company did not amortize any rent abatements; instead, abatements were expensed in the period granted.
Funds From Operations (FFO), which describe the cash flow of a real estate investment trust, totaled $723.2 million, or $2.05 per diluted share, as compared to $1.08 billion, or $3.05 per diluted share, in the prior year period. FFO is a commonly used metric for REITs, often taking net income and adds back items such as depreciation and amortization.
FFO in the current year period was negatively impacted by $1.10 per share due to reduced revenues caused by the impact of the Covid-19 pandemic, partially offset by approximately 23 cents per diluted share from cost reduction initiatives.
CEO’s Take: In reaction to the Cielo Vista closure, the CEO expressed disappointment over what he says is the inconsistent treatment of enclosed malls.
“Obviously, the level of inconsistency has been very frustrating. It’s been state by state, city by city, county by county,” Simon said. “It is a testament and often overlooked that we’ve been able to deal with this as well as we have…But we can only deal with what we can deal with. I don’t know if further restrictions will be in order. We have yet to see any evidence that our environment spreads anything.”