With expanded vaccine distribution in the U.S. and the number of cases in most areas waning, the consumer is venturing out, including to malls. Simon Property Group CEO David Simon this week was somewhat subdued in his discussion with analysts about the mall REIT's first quarter report, noting that the company's projections remain conservative. But he also said that among consumers in some areas, "there's clearly some level of euphoria around" the end of lockdowns and the government's pandemic aid.
"The country is still around, and we're still going to try to get back to normal," he said.
But the quarter's results also show an industry in flux. The movement toward online shopping and the trend of retailers abandoning enclosed malls, either through shrinking of their footprints or opting for alternative locations, were accelerated by the pandemic. Simon during the call reiterated his belief that a return to the suburbs will be a boon to malls, though that is still playing out.
The REIT's first quarter lease income was down 9.3% year over year to $1.15 billion, with total revenue down 8.4% to $1.24 billion, according to a company press release. In the U.S., the occupancy rate was at 90.8%, down from 94% in the year-ago quarter.
The company raised its guidance for the year in some measures, now estimating that net income will range from $4.47 to $4.57 per diluted share and funds from operations will be within a range of $9.70 to $9.80 per diluted share, with an increase of 13 cents per diluted share at the mid-point. That new midpoint implies a drop in funds from operations in coming quarters, according to a client note from Wells Fargo analysts Tamara Fique and Matthew Honnold.
Simon said that while the company expects "a reasonable improvement" in occupancy this year compared to last year, it's unlikely to return to 2019's levels for a couple more years. Occupancy is down in part because "if they're not paying what we think is fair, we'd just rather sit on empty space," he said. The company is also agreeing to more temporary leases in order to fill that space, something that Simon said adds more local and entrepreneurial tenants to the mix.
"The demand, frankly, I don't want to oversell it," he also said.
In the past 12 months, leasing spreads — the difference between rents in older leases versus newer ones — were down, in part because the company is more often agreeing to lower rents with a higher mix of rent based on percentage sales. This could be a boon as the economy improves but represents a higher level of risk.
"Believe me, I prefer to have had the higher base rent," Simon said, noting that lease renewals during the pandemic have entailed "difficult discussions."
In partnership with Authentic Brands Group (through their Sparc investment entity) and/or with rival Brookfield, the REIT owns an increasing number of retailers. Most notably, that includes department store J.C. Penney, and most recently, outdoor specialty retailer Eddie Bauer. The company, along with Brookfield, has been lobbying Congress for changes to REIT law that would allow them to own even more.
In recent weeks, the new owners slashed 650 jobs at J.C. Penney; overall results there are "above plan," Simon said. The struggling department store, late this year or sometime next year, will be selling "a lot of" the brands controlled by ABG. Those include the likes of Juicy Couture, Nine West, Nautica, Jones New York and Vince Camuto, among many others.
"But in order to turn J.C. Penney into a 21st century retailer, that's still work in progress," Simon said.