Simon Property Group gains reflect retail sector's strength

Nation's largest shopping mall owner posts strong first quarter

Simon Property Group gains reflect retail sector's strength

Indianapolis-based Simon Property Group Inc., the nation’s largest owner of shopping malls, reported positive earnings in its first quarter on Tuesday – reflective of continued strength in the retail sector even as other commercial real estate areas falter amid market downturns.

Net income attributable to common stockholders was $451.8 million, or $1.38 per diluted share versus $426.6 million, or $1.30 per diluted share, for the comparable period last year. Moreover, funds from operations (FFO) was $1.026 billion, or $2.74 per diluted share, compared to $1.015 billion, or $2.70 per diluted share, last year.

“We are off to a good start with results that exceeded our plan,” Davis Simon, chairman, president and chief executive officer, told shareholders during an earnings call. “First-quarter funds from operation were $1.03 billion or $2.74 per share. Domestic operations had a very good quarter and contributed $0.15 of growth, primarily driven by higher rental income. Our international operations also performed well and contributed $0.02 of growth.”

Retail resurgence reflected in company’s earnings

The positive performance for Simon Property Group emerged in spite of negative market forces, Simon explained. “These positive contributions were partially offset by declines from the headwind from a strong US dollar of $0.02, higher interest rate expense of $0.05, lower lease settlement income of $0.06 compared to Q1 of 2022, and we had a mark-to-market gain on publicly held securities of $0.06 for the quarter and a $0.13 lower contribution from our other platform investments compared to Q1 2022L,” Simon said.

It's been noted that – even in times of economic downturns – people will always need to buy stuff, and statistics bear this out. According to the National Retail Foundation, last year’s annual retail sale grew 7% over 2021 and totaled $4.9 trillion. “This growth rate is above the pre-pandemic, average annual retail sales growth of 3.6%,” the NRF noted in a statement. NRF retail sales figures exclude automobiles, gas stations and restaurants.

“This quarter also includes one-time transaction cost from ABG's recent acquisition activity, JCPenney's deployment of their new beauty initiative, and investments related to physical stores, IT, and one-time reorganization expenses, all flowing through our FFO number,” Simon explained.

“The retailer part of our OPI investments has seasonality associated with it generally with losses in the first quarter and the majority of our profit in the fourth quarter and should be modeled accordingly. Overall, we continued to expect OPI to meet our 2023 guidance we provided at the beginning of the year… which will be a similar FFO contribution that was compared to 2022. Now, domestic property NOI increased 4% year over year for the quarter.”

Portfolio NOI – which includes Simon Property Group’s international properties at current currency – grew by 3.9% for the quarter, Simon added. “Our mills, malls, and outlets occupancy at the end of the first quarter was 94.4%, an increase of 110 basis points compared to the prior year,” Simon said. “Mills was 97.3%, and TRG was 93.3%. Importantly, average base minimum rent was $55.84 per square foot, an increase of 3.1% year over year.”

Leasing momentum continues

Across the portfolio, leasing momentum continued: “We signed more than 1,200 leases for more than 5.9 million square feet in the quarter,” Simon said. “We have an additional 1,500 deals in our pipeline, including renewals for approximately $570 million in gross occupancy cost. More than 25% of our leasing activity in the first quarter was new deal volume.”

Simon ticked off other positive growth areas: “We're seeing strong broad-based demand from the retail community, including continued strength for many categories,” he said. “By the end of the second quarter, we expect to be approximately 75% complete with our 2023 expiration. Retail sales momentum continued. Reported retail sales per square foot reached another record in the first quarter at $759 per square foot for malls and premium outlets combined, an increase of 3.3%.”

Indeed, records were set: “All platforms achieved record sales level, including the mills at $683 a foot, a 2.2%, and TRG was $1,100 per square foot, a 6% increase,” he said. “Good news is, tourism is returning with our tourist-oriented centers outperforming the portfolio average in terms of sales. Our occupancy cost at the end of the first quarter was 12%. We opened our West Paris Designer Outlet in Normandy, France last week, our 35th international outlet center.”

While inflation continues to fall as the Fed hikes the interest rate, it may loom large this year – with negative effects on the retail industry. “Almost all retail executives expect inflation to pressure their profit margins,” researchers at Deloitte wrote in a recent report. “They’re also predicting hard times for consumers, with nearly all anticipating diminished consumption in 2023, resulting from rising financial concerns.”

And yet, the outlook is not all gloom-and-doom, researchers wrote. “Retailers have learned much about resiliency in the past few years,” the study’s authors said. “Massive demand fluctuations during the pandemic forced retailers to rethink archaic systems in favor of more pliable operations. They learned that rapidly evolving consumer preferences require more effective analytics and tools to build loyalty.”

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