Simon Property Group on Friday said third quarter funds from operations rose 7% year over year to $1.035 billion, or $2.89 per diluted share, which edged out the Zacks consensus estimate for $2.88 per share.
Occupancy at the property development company’s malls and outlets ended the quarter at 95.3%, an increase of 10 basis points compared to the end of the second quarter, the company said in a press release. Average base rent rose 3.3% to $52.42, year over year, reflecting strong retailer demand and pricing power. Reported retailer sales per square foot rose 3% to $622 compared to $604 in the prior-year period.
Natural disasters in Colorado, California, Texas and Florida wreaked some havoc in the quarter, and delays in the aftermath of Hurricane Maria in Puerto Rico will likely extract a measurable 3-cents-per-diluted share toll in the fourth quarter, due to the ongoing repair and restoration of the company’s two centers there. The company expects net income for the year to be within a range of $6.23 to $6.28 per diluted share and funds from operations to be within a range of $11.17 to $11.22 per diluted share, an increase of 3 cents per diluted share on the low end of its guidance offered Aug. 1.
Despite a fairly sunny third quarter, which contrasts the regular doom and gloom surrounding the state of mall retail, shares in Simon Property Group slid Friday. The mall real estate developer was likely suffering blowback from J.C. Penney’s guidance retreat because so many of Simon’s malls are anchored by those discount department stores.
CEO David Simon expressed confidence in J.C. Penney chief executive Marvin Ellison, but said he hadn’t yet seen the numbers, according to a conference call transcript from Seeking Alpha.
"I think that Marvin Ellison has done a very good job. We think they serve a real need to the consumer,"Simon said, according to the transcript. "I do think they’re still unfortunately dealing with some of the traumatic events of their different shareholder base. That's taking time, but it's a cash flow-generating company. We'll study the number, see what they all mean, but I think they definitely have a loyal consumer base and have a business that generates operating cash flow and I don't expect anything too radical there."
With an over-abundance of brick-and-mortar stores and malls in the U.S., Simon said the company may look to shed "at least a sale potentially by year-end or early next year."
But he also said that as long as a property generates cash flow, the company isn't likely to sell it. "I know this world doesn't want to focus on cash flow, but there's nothing to be embarrassed about cash flow. And I can take that cash flow and invest in something that's higher growth and that's okay," he said. "But we'll continue to prune the portfolio. We're in pretty good shape, if the value is right, but we're not going to do anything that's a fire sale because we really have no need to — we can operate effectively."
Wildfires, hailstorms and hurricanes interrupted healthy summer and early fall traffic, Simon said, as did the mass shooting in Las Vegas, though that impact was more psychological, he said. "It's so hard to predict, but these things, they don't just snap back day one," he said. "It does take time for people to get in their normal pattern. And I don't blame them, frankly. They've got other things to worry about."
While Simon wouldn’t talk specifics regarding plans for 2018, he did say the company’s longstanding perspective as a retail real estate company is shifting to "more mixed use opportunities" like the company’s King of Prussia shopping center in Pennsylvania.
Simon, who in the past has said that retailers are too quick to blame the internet for slow sales and that many have more to do to revamp their stores, also told analysts that many retailers to some extent are under-reporting their brick-and-mortar sales because Wall Street is rewarding strong e-commerce performance. "Let's face it, the market rewards an online sale more importantly than it does a brick-and-mortar," he said, noting that the company is addressing the complexities of accounting for omnichannel sales.
Indeed, research has shown that stores help boost online sales and that physical stores taking returns of online orders garner opportunities for sales, so that a percentage of a retailer's internet sales could be credited to the physical stores that influence them.