Simon Property Group on Monday reported strong momentum in leasing and sales during its first quarter, in an environment and business model with elevated volatility. As of March 31, occupancy was 93.3% compared to 90.8% a year ago, according to a company press release.
Simon signed more than 900 leases for more than 3 million square feet in the quarter and has “a significant number of leases in our pipeline,” CEO David Simon said on a call with analysts. But the company’s month-to-month leasing rose to 5.4% of gross annual rent revenue, up from 4.2% a year ago and 1.9% the previous quarter.
David Simon appeared to deflect reports that the company has bid on Kohl’s. “Please don't believe any rumors or media reports concerning our M&A activity,” he said. “We're really, really focused internally.”
Consumers have returned to shopping in brick-and-mortar stores in this stage of the pandemic, and malls are benefiting from that. Last month, visits to malls were down just 0.3% compared to 2019, a drastic improvement from March's two-year 10% decline, according to foot traffic analytics firm Placer.ai.
"Demand is very strong and interesting," David Simon told analysts. "With the volatility of the world, our portfolio in the U.S. is in great demand from worldwide brands, restaurants and entertainment operators, as most retailers and tenants view the U.S. as the place to be."
Uncertainty around consumer behavior due to inflation and the ongoing pandemic is overshadowing the near and long terms, however. But Simon downplayed the increase in month-to-month leasing, saying it was part of the company's strategy.
"These are really good properties and really important for the retailer, and we're taking our time to get that done," he said. "Whereas last year or the year before you might have seen a rush to get those signed up and in the door, we're taking a more strategic approach ... So it's really part of our strategy and ... my anticipation, without question, is that number will be way down for Q2."
In addition to the increase in month-to-month rather than years-long agreements, other more flexible lease terms are contributing to the uncertainty. That includes percentage-rent clauses, where tenants pay “overage rent” based on sales, on top of or instead of a fixed base rent.
"Obviously, we have a little more variability ... and I don't want to overdramatize this, but we have a little more variability than maybe we did 10 years ago, because of the overage rent that we've structured," Simon said. "I think we've actually structured it pretty smartly, but it does create a little more variability."
Given the consolidation among malls and the closure of so many underperforming malls, larger REITs are benefiting from "scale, access to capital, and strong tenant relationships," and Simon Property Group is the largest, Wells Fargo Senior Equity Analyst Tamara Fique said in emailed comments.
"However, we are worried that inflation and rising interest rates could weigh on the consumer and particularly discretionary spending over the medium-term, raising concerns around ongoing retailer store demand and overshadowing SPG's recent occupancy gains," Fique said.