Simon Property Group, among the country's largest and most prosperous real estate investment trusts, found it was not immune to the pandemic's financial fallout as the retail landlord's struggling tenants gave up space, legal costs rose and it granted rent breaks.
The shopping center and mall operator failed to meet Wall Street’s earnings expectations for the third quarter even as the company clocked improvements in shopper traffic, retail sales and tenant rent collections across its 204 outdoor shopping centers, outlets and enclosed malls.
Total revenue for the Indianapolis-based REIT dropped 25% to $1.06 billion, leading to a 73% plunge in income to $145.9 million, or 48 cents a share. At the same time, CEO David Simon said on a conference call late Monday with analysts that there was “solid profitability” and more than $600 million in cash flow generated in the quarter.
He blamed the shortfall on the havoc of the pandemic coupled with bankrupt tenants that abandoned space, unpaid rents and money spent on litigation. He also said about $270 million of lost income stemmed from domestic rent abatements and higher provisions for credit losses primarily associated with retail bankruptcies. The rent abatements were not amortized but recorded as negative lease income.
The majority of abatements were granted to thousands of local and small businesses and entrepreneurs struggling the most during shutdowns and with limited capacity constraints. That also contributed to lower sales volume at its properties.
“I hope the worst [is] behind us,” Simon said.
Funds from operations, an important industry metric, tumbled nearly 33% to $2.05 from $3.05 in the year-ago quarter and down from $2.12 in the previous quarter. Analysts forecast FFO at $2.29 a share, according to FactSet.
The pandemic-provoked shutdowns have hurt owners of shopping centers and malls, pushing some into Chapter 11 bankruptcy protection as tenants have gone out of business, closed stores or failed to pay rent. But analysts mostly thought Simon Property Group would recover quicker than others given its girth and deep pockets.
“The leasing environment is improving,” Simon added. In the third quarter alone, Simon Property Group signed 600 leases for nearly 2 million square feet of space with a “significant number of leases in our pipeline,” he said. “We continue to see strong interest for space across our [diversified] portfolio.”
Leasing terms have generally stayed the same, and tenant improvements have not risen much, according to Simon.
He wouldn’t identify the tenants but said they were mostly “box for box,” referring to big-box tenants that were taking over abandoned big-box spaces. He noted Simon Property Group has signed 20 leases with a “well-known casualwear business that’s growing its footprint significantly,” and said many home goods and home furnishing stores are looking to expand.
“There are a number of retailers closing stores and a number of bankruptcies, but the ones that are out there are looking to grow their footprints,” Simon said. “The healthiest retailers are looking toward the future and believe in having the right footprints … and are going to shrink the bad stores.”
As of the end of September, Simon Property Group's ownership or interest in the 204 U.S. properties spanned 37 states that include mostly outlet shopping centers and enclosed malls. Occupancy fell slightly in the quarter to 91.4% from 94.7% a year ago, primarily pushed by tenant bankruptcies.
At the same time, average base rent edged up nearly 3% year-over-year to $56.13. As of Nov. 6, Simon Property Group had collected 85% of its billed U.S. rents for the third quarter, up from 72% in the second quarter.
“While we’ve made significant progress in addressing collections, we still have some unresolved amounts with certain larger national tenants who unfortunately are refusing to pay their contractual rent though they are open and operating,” Simon said. In June, Simon Property Group filed suit against Gap, a major tenant, because it did not pay more than $65.9 million in rent during the onset of the pandemic.
The REIT continues to sit on a pile of cash that it could use should other retail or commercial real estate opportunities pop up. It is still ironing out the last negotiations of its deal with Brookfield Asset Management to purchase the J.C. Penney business, and Simon was clear that there are no other deals to be done this year. The company’s liquidity position of more than $9.7 billion includes $1.5 billion of cash on hand and $8.2 billion in a revolving credit line and term loans.
“Our plate is full,” Simon said.