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Why Simon Property Says Suburbs Will Be ‘Hot’

Is suburban the new urban?

According to David Simon, chairman and CEO of mall giant Simon Property Group, the “suburbs are going to be hot” in the aftermath of the coronavirus pandemic.

That trend is already well underway. Throngs of city-dwellers have decamped to leafy idylls in the wake of the Covid-19 outbreak, seeking to socially distance while securing more space than apartments, high-rises and mass transit afford. This affluent exodus to the burbs and exurbs could reshape the face of commerce for the long term, by some estimates.

Though during the recent urbanization boom many questioned why the suburbs would even exist if most people were flocking to urban environments, now the equation has changed, Simon said. “[O]ur quality real estate is going to be where the action is for those well-located suburban centers of commerce,” he told Wall Street analysts Monday. “And that’s going to be the big change coming out of the pandemic.”

But for now, the mall REIT has its hands full “still dealing with crap everywhere,” Simon told investors as the company reported fourth-quarter and full-year 2020 results. The pandemic, well into an unpredictable second wave seething with new, highly transmissible virus variants, is forcing lockdowns around the globe, keeping some properties shuttered while others navigate through restrictions. Simon said that some foreign governments focus their harshest restrictions on malls and outlets, which only sows confusion if they’re permitting high streets to remain open and operating.

Despite missing a fourth-quarter free cash flow estimate, Simon sees good things ahead this year. “We feel confident we turned the corner,” he said, adding that the REIT expects “growth cash flow and earnings in 2021.” The CEO said he was “unable to speak to” the SPAC it recently filed to establish, citing the customary quiet period.

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Net income for the fourth quarter ended Dec. 31 fell 47 percent to $271.5 million, or 86 cents a diluted share, from $510.2 million, or $1.66, a year ago. Total revenue fell 24 percent to $1.13 billion from $1.49 billion. Funds from operations, or FFO, a measure used by real estate investment trusts to show cash flow from operations, was $786.6 million, or $2.17 a diluted share, for the quarter, it said.

For the year, net income fell 47 percent to $1.11 billion, or $3.59 a diluted share, from $2.10 billion, or $6.81 in 2019. Total revenue fell 20 percent to $4.61 billion from $5.76 billion. The company said FFO for the year was $3.24 billion, or $9.11 a diluted share.

The company expects net income at between $4.60 to $4.85 a diluted share in 2021, with FFO within the range of $9.50 to $9.75 for the year ending Dec. 31, 2021. That compares with the $9.11 a share for FFO in 2020. Occupancy at the end of 2020 was 91.3 percent.

Suspicion on Sycamore

Separately, the mall landlord, along with Taubman Realty Group, isn’t so keen on Sycamore Partners’ deal to acquire some of Ascena Retail Group’s brands. Simon, which took an 80 percent majority stake in Taubman in December, filed court papers seeking to block bankrupt Ascena’s reorganization.

The document, an objection, said that Sycamore—which acquired Ann Taylor, Loft, Lane Bryant and Lou & Grey—had promised to take “at least 900 stores” as part of the sale, preserving both the business and thousands of jobs and leaving the determination and process for assuming or rejecting store leases.

But the mall landlords said that Sycamore has since “laid bare its intention to significantly reduce the business’ physicals store presence in the near term. The result will be a significantly less creditworthy lessee than the entity with which the Simon landlords originally contracted.” It added that a far greater risk was Sycamore’s plan to close a number of “profitable stores and reserving for possibly assumption and assignment a significant proportion of the remaining leases with short remaining terms.”

The court document said that Sycamore plans to close 160 of the 226 stores leased from the Simon landlords, locations that Ascena had planned to keep as recently as November. Ascena completed the asset sale to Sycamore in December.

The court papers also said the reduced store footprint and mix of remaining stores not only will diminish the profitability of the brick-and-mortar business, but also hurt its ecommerce operation as stores are instrumental in driving digital sales. Simon said its concern is based on its own experience operating stores, including JCPenney, Brooks Brothers, Lucky Brand, Forever 21 and Aéropostale, which it acquired out of bankruptcy in 2016 as part of a consortium. Sycamore, which had an investment stake in the teen retailer, fought a bitter dispute with the chain and had pushed for its liquidation.

To illustrate its point, Simon also charged that Sycamore has a history of bankrupting retailers, citing the private-equity firm’s failed investment in Nine West and the upcoming Belk bankruptcy, and said Talbots could be the next retailer to restructure.

A spokesman for Sycamore declined comment.