Simon Property Sees Leasing Picking Up As Retailers "Get Back To What They Do Best"

Simon Property Group chief executive David Simon says he’s bullish on leasing in 2021, but cautions it will “take some time” to return to heady pre-pandemic levels.

In the REIT’s fourth quarter earnings call, Simon said the REIT has built in a reserve—though he declined to provide a specific number—for further bankruptcies and additional rent abatements and outlined guidance of $9.50 to $9.75 per share for 2021. Simon acknowledged the range is “tight,” and said the company added its reserve out of an abundance of caution. 

Fourth quarter funds from operations, or FFO, clocked in at $2.17 per share for a total of $787 million, an amount Simon said was diluted by the company’s recent equity offering. The company generated $900 million in operating cash flow during the quarter and collected 90% of net rent builds for the second, third, and fourth quarters combined. A handful of large tenants have yet to resolve receivables, according to Simon, but the company anticipates resolving those in the near term. 

“We still have some large retailers, frustratingly, that we have not solved,” he said. “Not because of us. We’ve tried, but we haven’t gotten to the finish line.”

Portfolio NOI decreased 23.9% year-over-year in the fourth quarter, largely a result of a $220 million in aggregate domestic rent abatements and uncollectible rents associated with retail bankruptcies.  Seasonality also impacted NOI in the fourth quarter, Simon said, but was offset somewhat by the company’s cost reduction initiatives.  SPG predicts NOI growth will be between 4-5% this year.

Simon, the nation’s largest mall owner, has extended around $400 million in tenant relief as a result of the pandemic, including around $340 million in granted deferrals through the end of last year. Average base minimum rent for the fourth quarter was $55.80, a 2.2% increase over the course of 2020.

Simon noted that sales are “all over the place,” but said SPG expects occupancies to edge up. Leasing momentum is continuing to build, with SPG signing 1,400 leases totaling 6 million square feet in the fourth quarter. Simon also noted a “significant number” of leases in the REIT’s pipeline, saying he’s “starting to see our retailers get back to what they do best, and that is operate stores.”

Simon acknowledged that a backfill of space remains as the country digs out of the economic recesses of the COVID-19 pandemic, but said the REIT hopes to increase occupancy in 2021 and noted the strength of its portfolio, as well as the properties it acquired as a result of its newly-acquired 80% interest in Taubman Centers, as advantages. He also noted that while it may take a while to get back to 2019-era leasing levels, healthy retailers with a solid plan are back to dealmaking. Well-known chains like Dick’s Sporting Goods and Kohl’s are currently in talks with SPG for new store locations, he said.

“Are we back to normal? Not yet, but we’re working our way back,” Simon said. “Generally, it’s still a very serious, intense negotiation on renewals. Retailers are generally cautious. But the ones that want to grow their business are excited.”

SPG’s 2020 earnings took a relative hit, with Funds From Operations at $3.237 billion, or $9.11 per diluted share. The FFO was negatively impacted by $2.67 per diluted share as a result of reduced revenues relating to COVID-19. Year-over-year profits and sales were down in Q4, thanks largely to a slump in retail and restaurant businesses impacted by COVID shutdowns.