Simon Touts Strong Fundamentals Despite Overall Economic Uncertainty

Coming after the close of one of the worst trading days in recent history, shopping mall REIT Simon Property Group acknowledged rising macroeconomic fears that a downturn could be on the way.

But executives of the Indianapolis-based trust, America’s largest mall owner, offered an upbeat assessment of its Q2 results and the state of the retail market in general Monday evening, saying any looming recession would only widen the gap between Simon and other operators.

“We are seeing increased leasing volumes, occupancy gains, shopper traffic and retail sales volumes, resulting in the company’s highest level of real estate NOI for the second quarter in our company’s history,” Simon Property Group CEO David Simon said during the earnings call. “Demand for our space from a broad spectrum of tenants is strong and steady.”

Occupancy at the end of the second quarter was 95.6%, almost a full percentage point above the 94.7% at the end of Q2 2023, according to Simon's earnings results. Net income came in at $493.5M, or $1.51 per share, up from $486.3M, or $1.49 per share, for the same quarter in 2023. 

Stock market fears and a potential recession could bite into consumer confidence, executives said. Not addressed on the call was the REIT's plans to relinquish the Philadelphia Mills mall to lenders after it struggled to pay off $290M in securitized debt tied to the property. 

But temporary pain won't stop long-term gain, according to Simon, who said the REIT is in a position to better the company and find opportunities no matter the economic environment.

“We don't want to go through a recession, but if we do, the gap between us and everybody else just gets bigger and bigger,” he said.

The REIT plans to open the 100% leased Tulsa Premium Outlets in Oklahoma on Aug. 15. It is also developing 234 luxury residential units at Northgate Station, a shopping center in Seattle, Simon said.

“Honestly, I'm not looking at a potential recession or tough market as any basis to slow down,” he said.

Simon budgeted for flat retail sales this year and is coming in above that, giving it a bit of cushion, Simon said. While lower-income consumers remain under pressure from inflation, higher-end consumers are in a good spot, he said.

Retailer sales per SF were $741 for the year ending June 30, down from $747 for the year ending June 30, 2023. But base minimum rent per SF rose from $56.27 in June 2023 to $57.94 in June 2024.

How consumer activity changes will depend on the overall market and employment picture, Simon said.

“I think we're going to cycle more positively in the lower-end consumer, and I think the higher-end consumer [is] steady as she goes,” he said.

Although executives didn't mention the 1.7M SF Philadelphia Mills outlet mall that Simon Property plans to relinquish to the holders of its CMBS debt, Simon did express interest in avoiding a similar situation in the future. Philadelphia Mills came into the group’s portfolio after Simon acquired Mills Corp. in 2007.

“We’re basically out of the portfolio business, as far as I can see,” Simon said. “Things can change, but I just don’t see us buying another big portfolio where we’d have to swap off a handful of properties.” 

Simon hasn’t acquired any external properties for some time, but it is open to looking at appropriately priced quality products where it can add value, Simon said, adding it will be selective in acquiring properties.

Simon said the REIT's performance has been property-specific and not based on qualities like outlet versus traditional or indoor versus open-air centers. 

Simon executives also seemed unconcerned about upcoming maturities. It completed 10 refinancings during the first half of the year totaling $1.1B at an average interest rate of 6.36%, Chief Financial Officer Brian McDade said.

“We're not living mortgage to mortgage,” Simon said. “We're a different kind of company.” 

Simon raised its quarterly dividend and increased the midpoint on its full-year guidance based on its second-quarter earnings, which saw expectation-toppling revenue of $1.46B. 

Although the funds from operations fell short of Wall Street expectations — it reached $1.09B, or $2.90 per share, below the Zacks Investment Research estimate of $2.93 per share — the group’s revenue exceeded analyst benchmarks. Analysts had estimated revenue of $1.43B.