Must-know: The future of Simon Property Group

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Must-know: Simon Property Group's 2Q14 earnings (Part 4 of 4)

(Continued from Part 3)

Future of Simon Property Group

Simon Property Group’s (SPG) management has stressed that in spite of disappointing retail sales, the company was still able to drive revenue growth. Growth in funds for operations (or FFO) can almost be decoupled from retail sales. This is due to Simon’s high-quality portfolio and the fact that there’s still strong demand for high-quality retail space. Simon is re-branding itself. It’s too early to see how that’s working, but initial indications are good.

Highlights of the conference call

The company characterized the quarter as “eventful and productive.” Overall, business conditions remain favorable and there’s strong demand for space. They’re seeing increased leasing spreads. Their two big malls being opened this summer, Charlotte and Twin Cities, are fully leased. Interestingly, Simon sees more opportunity in the residential segment, where luxury apartments are co-located with upscale shopping malls.

The state of the industry

Many analysts are worried about the mall real estate investment trusts (or REITs) and whether the shopping mall concept is outdated. Also, analysts are worried that increases in internet sales will come at the expense of brick and mortar retailers. In fact, this is a bit of a misperception because internet sales are basically replacing catalog sales.

Simon believes the industry will continue to grow. It’s seeing an ability to increase rents in the outlet sector. More retailers are entering the sector as an additional prong in their strategy. Occupancy rates increased 140 basis points year-over-year (or YoY), to 96.5%, while sales per square foot and base rent per square foot also increased.

Anchor tenant difficulties

On the fourth quarter conference call, management was asked about their strategy regarding two struggling retailers who are normally considered anchor tenants. J.C. Penney (or JCP) and Sears Holdings (or SHLD) are both in the process of closing unprofitable stores and reorganizing. Management said that they have already identified suitable tenants to replace some of the closing stores and have even been able to raise rental prices. They have a plan in place and anticipate a positive sales impact. Regardless of the state of shopping malls in general, Simon believes it has a growth strategy—which should mean a steadily increasing dividend. This should also mean good things for Simon’s competitors—General Growth Properties (GGP), Macerich (MAC), Taubman (TCO), and the Realty Income Fund (O).

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