After a pandemic year in which much of retail was temporarily shut down, mall operator Simon Property Group CEO David Simon is upbeat about the future, June revenue returning to pre-pandemic levels continued demand from new retailers.
In a Nutshell: During a call to Wall Street analysts Monday, chairman and CEO David Simon said that demand for space at the company’s shopping malls is increasing.
“We continue to see demand for space across our portfolio from healthy local, regional and national tenants, entrepreneurs, restaurateurs and mixed-use demand… increasing day by day,” he said, adding, “We’re tickled pink by the demand by the new retailers and tenants that are surfacing the many, many opportunities that we have with restaurants, with mixed-use development.”
Simon acknowledged that while there’s still a “hole to dig out of because of the bankruptcies that we had to confront with the pandemic,” the leasing activity has been “pretty encouraging.”
More than 11,000 fashion-related doors closed last year, including many retailers that shuttered mall-based stores. Now, according to Simon, things are looking up. In fact, the CEO said total sales for June were “equal to June 2019 and up 80 percent compared to last year, and were approximately 5 percent higher than May sales,” he said.
While the company had to lower the base rent in some cases, and take percentage rent on future sales for any upside going forward, that’s not necessarily the new normal going forward, he said, describing the arrangement as “tenant by tenant.”
“The strategy we adopted in the height of the pandemic is playing out better than we could have expected,” he said.” We made the right move. We got the renewals done. We accommodated the vast majority of retailers, assuming they were reasonable in their approach. We got the job done. We kept our properties functioning. We bet on the rebound, and we’re seeing the benefits of that.”
Anyone who thinks retail is dead is “throwing the baby out with the bathwater,” he continued. “Read my lips, physical retail is here to stay and people really like to shop in the physical world. So don’t believe everything you hear on TV. We’ve got the evidence.”
Despite reports of higher Covid-19 infection rates, so far Simon Property Group hasn’t seen an uptick in Covid cases at the mall, even though some are located is hot spots like malls in Missouri, according to the CEO.
“The mall is safe, okay? And so even though we’re starting to see counties talk about indoors, there’s no science about the mall,” Simon said, noting that he believes “we’ve been mistreated in this whole 18-month ordeal.” Even in Florida, which has seen a spike in coronavirus infections, “we have not seen in an enclosed mall an uptick in Covid cases for the people that are in the mall, the staff, whether it’s a retailer or a management team, period. End of story. No question about that.”
While he’s hopeful people will get vaccinated, Simon Property is not going to mandate vaccines., he said. And if there’s a need to reinstate face coverings, “we’re going to mask up,” the CEO said. He’s hopeful that lockdowns are a thing of the past. “I studied Sweden. I studied France. Covid reverts to the mean. Sweden did not lock down; France did. And if you look at the chart on Covid cases, it all reverts to the mean, lockdown or no lockdown. So let us do our business, mask up if you need to, the mall is safe,” Simon said.
During the second quarter, the mall operator opened the Midlands Designer Outlet in England in April, a site in which it has a 23 percent interest. And it re-started construction on Paris-Giverny Designer Outlet in the Western Paris suburb of Normanie for a third outlet in France, which is slated to open in the first quarter of 2023. Simon has a 74 percent interest in this location.
In addition, the CEO said the global brands within the Sparc Group, its joint venture with Authentic Brands Group, “outperformed their budget in the quarter on sales, gross margin and EBITDA (earnings before interest, taxes, depreciation and amortization), led by Forever 21 and Aéropostale. Sparc’s newest brand, Eddie Bauer, also outperformed initial expectations.”
Simon said JCPenney continues to outperform its plan. “Their liquidity position is growing, now $1.4 billion and they do not have any outstanding balance on their line of credit,” the CEO said. The mass merchant will introduce several private national brands later this year, along with a new beauty initiative, he added.
Simon Property’s acquisition of Taubman Realty Group has also done well, Simon said, adding that the combined property portfolio shows “resilience as sales are quickly returning to pre-pandemic levels.”
Net Sales: Total revenue for the quarter ended June 30 rose 18 percent to $1.25 billion from $1.06 billion, which included a 14 percent increase in lease income to $1.16 billion. The balance of revenue was from management fees and other revenues.
The U.S. mall and premium occupancy rate was 91.8 percent on June 30, with the base minimum rent per square foot at $55.03.
At the end of the quarter, the company had more than $8.8 billion of liquidity, including $1.9 billion of cash on hand and $6.9 billion of available capacity under its revolving credit facilities.
For the six months, total revenue was up 3 percent to $2.49 billion from $2.42 billion, which included a 1 percent gain in lease income to $2.30 billion.
Earnings: Net income for the quarter more than doubled to $617.3 million, or $1.88 a diluted share, from $254.2 million, or 83 cents, in the year-ago quarter.
Results in the quarter included a noncash gain of $118.4 million, or 32 cents a diluted share, in connection with the reversal of a deferred tax liability connected with an international investment. Funds from operations (FFO) for the quarter was $1.22 billion, or $3.24 a diluted share. That compares with $746.5 million in the year-ago quarter, or $2.12 a diluted share. FFO is used by real estate investment trusts as a measurement of operating performance reflecting the cash flow from their operations.
The company said it expects net income for the year to be in the range of $5.47 to $5.57 a diluted share, and funds from operations (FFO) of $10.70 to $10.80 a diluted share for the year ending Dec. 31, 2021. The new FFO guidance represents an increase from the $9.70 to $9.80 a diluted share range provided by the company on May 10, 2021. Separately, the company’s board declared a quarterly common stock cash dividend of $1.50 for the third quarter of 2021, representing a 15.4 percent increase year-over-year and a 7.1 percent increase compared to the second quarter 2021 dividend. The dividend will be payable on Sept. 30, 2021 to shareholders of record on Sept. 9, 2021.
For the six months, net income grew 54 percent to $1.06 billion, or $3.24 a diluted share, from $691.8 million, or $2.26, in the year-ago period.
CEO’s Take: “I am pleased with the profitability and substantial improvement in cash flow that were generated in the second quarter,” Simon said. “We are encouraged by the increase in our shopper traffic, retailer sales and leasing activity. Based upon our results to date and expectations for the remainder of 2021, we are again increasing our full-year 2021 guidance and again raising our quarterly dividend.”