The Real Deal Chicago

Simon posts record Q4; CEO “excited” about evolution of mall industry

Retail REIT will beef up in area of mixed-use development, said David Simon
By John O’Brien | February 01, 2019 03:00PM

Simon Property Group CEO David Simon and the Orland Square Mall

Simon Property Group posted record numbers in the fourth quarter, even as mall landlords nationwide faced challenges including retail chain bankruptcies and the growing shift to e-commerce.

In a Friday earnings call, the retail giant’s CEO, David Simon, said he is “excited” about the evolution of the mall industry, despite all its challenges. “There’s always been disruption in our industry,” Simon added.

Mall owners have started to redevelop former big boxes into residential developments, sprawling “country club”-like fitness centers, medical facilities, co-working spaces and more. Simon said his firm has dozens such conversions in the pipeline or already underway, spending $725 million on redevelopments in 2018.

“The area we’re going to be beefing up is in the area of mixed-use development,” he said.

In the fourth quarter, net income jumped 25 percent to $712.8 million, and funds from operations was up 3.5 percent to $1.2 billion.

For the year, Simon saw a 5.3 percent increase in reported U.S. retailer sales per square foot to $661, a record for the firm. Occupancy held steady, finishing 2018 at 95.9 percent.

The Indianapolis-based REIT ended 2018 with net income of $2.4 billion, a 26.1 percent increase over 2017, while funds from operations rose 8.2 percent in 2018 to $4.3 billion.

But mall landlords nationwide have been dealing in recent years with big-box spaces left vacant after retail chain bankruptcies or the continued struggles of Sears Holdings to stay alive. Simon previously said the closures actually provide an opportunity to mall owners, who can redevelop the empty space into new diversified — and sometimes nontraditional — uses and come out ahead.

He reiterated that Friday, saying “reclaiming department store space continues to be a priority” for the company.

Still, the company’s future remains tied to the performance of its tenants, some of whom are doing well — particularly luxury brands — despite all the retail doom and gloom, he said.

“On the retail front the strong are getting stronger,” he said, though he conceded “that rising tide doesn’t lift all boats.”

Without mentioning Sears specifically, he said retailers who are struggling are in many cases “over-leveraged.”

“We are concerned about a few retailers,” he said. “It’s something we’ve been able to withstand. We can withstand the ups and downs of a retailer.”

Despite some recent big-name mergers and acquisitions in the industry, including Brookfield Property Partners’ buyout of GGP and Unibail-Rodamco’s takeover of Westfield Corporation, Simon has no plans to follow suit.