Simon Property Group Gains in First Quarter

Occupancy, funds from operations rise despite flat tenant sales.

Forget the ebb and flow of retail — things are just fine from the perch of David Simon, chairman and chief executive officer of Simon Property Group.

This story first appeared in the April 23, 2014 issue of WWD.  Subscribe Today.

The mall operator saw its funds from operations — the standard yardstick for real estate operating performance — gain 16.6 percent to $865.3 million in the first quarter. This came despite decidedly lackluster sales at the retailers it leased space to: Tenants’ sales per square foot inched up just 0.2 percent to $576 versus a year ago.

But demand for space is up, with occupancy as of March 31 rising to 95.5 percent, up from 94.7 percent a year earlier.

“There are a number of key retailers that are really not performing that well,” Simon said on a conference call with analysts. “Yet that has nothing to do with what the market value of that space can be.…Retailers come and go. If we were worried about retail sales, this company was originally built — we had Kmart as our anchors. And if we had looked at Kmart sales, we would have suggested that our sales — our revenues could never grow.”

Rick Sokolov, president and chief operating officer, singled out Lego, Zara and H&M as part of a “very vibrant group of tenants that are looking to expand.”

But expansion is not the rule in retail, and real estate companies, including Simon, are focused on remodels and on the growing outlet sector.

Simon is relocating a Bloomingdale’s at its Stanford Shopping Center in Palo Alto, Calif., and is redeveloping its former location to add 120,000 new square feet of space for small shops and restaurants. And the Saks Fifth Avenue at The Galleria in Houston is being relocated to a new prototype store and the move will open up 105,000 square feet for other luxe stores and restaurants.

Simon said the company expects to invest at least $1 billion in redevelopments annually through 2016.

The company is also looking at expanding its outlet business internationally.

“We have a good outlet potential in Mexico where we got a couple of new sites that we’re pursuing aggressively, including the expansion of our one outlet there,” Simon said. “The Brazilian outlet opportunity is somewhat dormant at this point. I couldn’t find the right sites in the market. We were fortuitous in that the market obviously is correcting there, so we had no capital at risk, and we have nothing necessarily planned there.”

The company is also looking at additional outlet outposts in Asia.