U.S. Markets closed

The current state of the industry and the consumer: An overview

Brent Nyitray, CFA, MBA

Simon Property Group's 1Q14 earnings: Important takeaways (Part 4 of 4)

(Continued from Part 3)

State of the consumer

During the conference call, Simon Property’s management stressed that in spite of disappointing retail sales, the company was still able to drive revenue growth and that growth in FFO can almost be decoupled from retail sales. This is due to Simon’s high-quality portfolio and the fact that there is still strong demand for high-quality retail space.

The management noted that there were a number of issues affecting the consumer, particularly the tax increases that took place at the beginning of 2012, uncertainty regarding Obamacare, and even weather during the fourth quarter. Despite these headwinds, the holiday shopping period was not terrible, and it is possible that retail sales may accelerate into the summer as the economy recovers.

The state of the industry

Many analysts are worried about the mall REITs and whether the shopping mall concept is passé. 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, as internet sales are basically replacing catalog sales.

Simon believes the industry will continue to grow, and it’s seeing an ability to increase rents in the outlet sector. More and more retailers are entering the sector as an additional prong in their strategy. Occupancy rates increased 80 basis points year-over-year, to 95.5%, while sales per square foot increased, as did base rent per square foot.

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 (JCP) and Sears Holdings (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).

Browse this series on Market Realist: