EUR 850.00 For Business Accounts Only

Morningstar | Healthy Economy Leads to Healthy 2Q for Simon Property Group

Second-quarter results for Simon Property Group were strong as the company benefited from a healthy economy, higher consumer spending, and improving tenant mix. Retail sales per square foot were up 4.6% from last year, the best single quarter of sales growth since the first quarter of 2013 and continuing a two-year trend of improving sales. Occupancy improved sequentially by 10 basis points to 94.7%, though it was still down 50 basis points year over year. Re-leasing spreads were up 10.7%, continuing a streak of double-digit spreads since the beginning of 2012 but also continuing a trend of decelerating spreads since the end of 2015. As a result, base minimum rent per square foot was up 3.3%, and same-store net operating income was up 2.3%.

The company reported funds from operation of $2.98 per share for the quarter, $0.02 above our estimate and a 20.6% year-over-year increase, though about three fourth of this increase was due to an easy comp from a loss on extinguishment of debt charge in the second quarter of 2017. Simon raised its FFO guidance by $0.09 at the midpoint to a new range of $12.05-$12.13, 2.6% above our current 2018 forecast. Overall, we see this being a very strong quarter for Simon but still remain cautious about the long-term outlook for malls, leading us to reaffirm our $146 fair value estimate and no-moat rating.

One interesting trend to follow is the success of the e-retailer incubator that Simon established in Roosevelt Field, its high-quality mall just outside New York City on Long Island. Called The Edit @ Roosevelt, this space creates a 20- to 200-square-foot micro storefront for pure e-commerce retailers to experiment with the possibility of a physical storefront. We like the possibility that this incubator will help bridge the gap from e-commerce only to an omnichannel strategy, creating more tenants for Simon over time. Having only opened in November, Simon has already had success translating one of the tenants into opening physical stores in multiple locations throughout Simon's portfolio. In addition to pure e-commerce retailers, international retailers are using the space to experiment with moving into the U.S. market, which has the potential to create further demand for Simon's high-quality portfolio if these retailers decide to expand in the United States. The space currently serves a dozen or so tenants on 45- to 60-day leases, rotating in new tenants when old leases expire. For many shoppers, the rotating list of retailers creates an additional draw to the property to see what new products will be featured, driving more foot traffic to the mall. We will continue to watch for evidence of the incubator experiment at Simon and at other retail landlords potentially generating additional tenant demand for their retail space.