The Real Deal Chicago

Simon Property Group CEO: “We’re putting Sears in our rear view mirror”

David Simon said Sears closings in his firm’s malls provide an opportunity for redevelopment
By John O’Brien | October 25, 2018 12:03PM

Simon Property Group CEO David Simon and Sears CEO Edward Lampert (Credit: Getty Images)

Simon Property Group CEO David Simon said the continuing waves of Sears Holdings store closings are providing an opportunity for the mall operator, not hurting it.

In an earnings call Thursday morning, Simon said 33 stores in Simon-owned properties have closed or will close around the end of this year. Simon said the 17 controlled solely by his REIT will be demolished, replaced and redeveloped — an effort that will cost $1 billion.

“We’re putting Sears in our rear view mirror,” Simon said.

Simon’s comments came as the REIT announced third-quarter earnings that included a 10 percent increase in funds from operations to $3.2 billion year over year and a 4.5 percent year-over-year increase in reported U.S. retailer sales per square foot to $650.

Total net operating income grew 4.1 percent in the first nine months of the year, the company reported.

Simon said mall owners can find opportunities in the closing of Sears stores and other big box retailers because they pay low rent compared to other tenants. Dividing those stores and replacing them with smaller retailers or new uses like apartments or offices can provide higher returns for the property owners, he said.

“Maybe our industry just got too carried away with all the department store boxes,” he said. “We don’t need all those. We don’t get any economic benefit from those boxes.”

“The ability to reclaim that space allows us to densify it,” Simon said.

Simon pointed to redevelopments of several of his properties across the country, including Northgate Mall in Seattle, Phipps Plaza in Atlanta and the Brea Mall in California, which will include a new three-story, 120,000-square-foot Life Time Athletic location as well as residential, entertainment, restaurants and new retail. All three properties lost Sears locations.

“We do feel like there’s a lot of fun stuff to do,” he said.

The new uses drive traffic to the malls the way the anchors used to, and other department stores pick up some of the traffic lost when a big box closes, he said.

“At the end of the day this will be a good thing for us and likely the whole industry,” he said.

Simon said nobody wanted to see Sears file for bankruptcy, and no one wants to see the firm liquidated, “but we’re going to make the best out of it.”

“It is a tragic set of events that a company that has been around for so long is in this tragic state of affairs,” he said.

In addition to the 17 closed or closing Sears locations that Simon controls in its properties, a joint venture of Simon and Seritage Growth Properties controls five others. Sears controls five of the others, while Seritage alone controls the other six.

Simon, which was named to the Sears creditors’ committee this week, has another 29 years stores still operating in its locations. Simon controls eight, Seritage controls four, and Sears controls the remaining 17.

“We’ve planned for the ultimate, unfortunate demise of Sears and we’re prepared for it,” he said. “We’ll have to wait to see what happens,” he said.

Among the possibilities are Simon picking up some of the Sears- or Seritage-controlled locations.

“We would love to own at the right price, any of the real estate we don’t control,” he said.