'We Wish That New Owner The Best Of Luck': Simon Continues Handing Back Struggling Malls

As Simon Property Group reels from the coronavirus pandemic’s gut punch to retail, the REIT continues to let smaller and worse-performing malls fall by the wayside.

Last week, Simon relinquished its ownership of an Atlanta mall in a foreclosure auction that saw no bids. In November, the REIT ceded control of at least four other mall properties it controlled. This week, according to Fitch Ratings, the mall operator is over 60 days delinquent on an $85.6M loan backing a Boston-area mall for the second time in four months.

The news comes after a dim earnings report Monday, in which Simon reported a $1B drop in revenue and income from 2019 to 2020. In the company’s earnings call Monday evening, Chairman and CEO David Simon acknowledged that it will work with lenders who are open to taking over some of the REIT’s underperforming malls.

“In some cases, they’ll be restructured, mutually agreed to; and if not, and the special servicer would like to own the real estate, we’re more than happy to cooperate and do it in a professional manner,” Simon said Monday, according to a transcript of the call. "It’s absolutely in the best interest of Simon Property Group shareholders those decisions that we’re making on that front ... [We] hope to make deals in some — if not, then they’ll no longer be part of our portfolio, and we wish that new owner the best of luck."

Simon is delinquent again on interest payments on its portion of the Square One Mall in Saugus, according to special servicer notes. Simon lists the mall in a section of its earnings report titled “Other Properties.”

Also on that list are many of the malls that Simon has given back to lenders over the past few months, such as the 1.2M SF Town Center at Cobb near Atlanta, The Mall at Tuttle Crossing in Ohio, Crystal Mall in Waterford, Connecticut, and the Southridge Mall in Wisconsin.

Simon also included the Emerald Square Mall in North Attleboro, Massachusetts, on the list, which was placed in court receivership in November, The Sun Chronicle reported. A court-appointed manager is currently searching for a new owner. 

It is unclear the purpose of the list on Simon’s balance sheet, but combined the properties make up over 14M SF of Simon’s 180M SF U.S. portfolio, or 7.9%. Simon owed a combined $714M on those properties at the end of 2020.

The other malls included on the "other properties" list are:

• Calhoun Outlet Marketplace in Calhoun, Georgia.
• Circle Centre Mall in Indianapolis.
• Dover Mall in Dover, Delaware.
• Florida Keys Outlet Marketplace in Florida City, Florida.
• Gaffney Outlet Marketplace in Gaffney, South Carolina.
• Liberty Tree Mall in Danvers, Massachusetts.
• The Orlando Outlet Marketplace in Orlando, Florida.
• Osage Beach Outlet Marketplace in Osage Beach, Missouri.
• Philadelphia Mills in Pennsylvania.
• Sugarloaf Mills in Lawrenceville, Georgia.
• The Avenues in Jacksonville, Florida.

The 542K SF Square One Mall at 1201 Broadway off Route 1 entered special servicing in July. The loan was modified in September after being delinquent for more than 60 days, but special servicer Rialto Capital Advisors noted that Simon is more than 60 days delinquent for the second time in four months.

Simon’s owned portion of the mall is 81.1% leased, according to Fitch Ratings, but the mall at large is just 66% occupied following the departure of Sears in September. Its revenues and cash flow have significantly dropped this year as a result of the pandemic, despite ongoing performance from leased anchors Dick's Sporting Goods and T.J. Maxx. The vacant Sears and still-open Macy's in the mall are not part of the loan's collateral.

Fitch projected a loss expectation of approximately 49% from the appraised value of the property, which was underwritten as $201M when the CMBS loan was issued in 2011. Simon has 12 months left before the loan matures, with an outstanding balance of $85.6M.

While the smaller malls in Simon’s portfolio generate a few million dollars in net operating income, the REIT’s premium assets, such as the Copley, South Shore and North Shore malls near Boston, are the powerhouses that will fuel its recovery, said Piper Sandler Equity Research Managing Director Alexander Goldfarb, an analyst who covers the REIT.

"From our standpoint, from an investor standpoint, it's the malls that matter that you really focus on," Goldfarb said. "Copley, South Shore, North Shore, those are the powerhouses. I’m sure the Saugus mall is a lovely mall, but there are [other] productive centers in the Boston metro."

Goldfarb referred to David Simon’s comments following Monday’s fourth-quarter earnings report, in which the REIT reported a 17.1% decline in NOI in 2020 due to reduced revenues from rent abatements, higher uncollectible rents and a reduction in property income. Simon's earnings beat analyst estimates and it anticipates a strong comeback for most of its properties.

“Their top centers are generating $50M-plus of NOI,” Goldfarb said. “If you have a few centers, and I’m not trying to begrudge a few, but if you have a few of them where the NOI contribution is a few million dollars, it really doesn’t matter, right? Heck, one of their top malls could easily do that in just holiday, temporary income.”

Simon reported a nearly $1B decline in lease income in 2020, attributing declining revenues to a loss of approximately 13,500 shopping days at Simon portfolio properties. The mall operator also counted $331M in deferral agreements and $410M in abatements granted.