Five Key Quotes from SPG about Retail REITs

Simon Property Group (SPG) says it is “probably one of the few real estate companies that have effectively increased [its] 2008 guidance.” Their Q308 results indicate that retailers are slowing down, but they recommend taking the catastrophic numbers reported by tracking agencies with a grain of salt. They note that life insurance companies are hesitating to renew leases.

Not too bad overall for malls:

Occupancy in the mall portfolio was 92.5% as compared to 92.7% in the year earlier period despite the fact that square footage lost to bankruptcy for the first nine months of 2008 totaled 435,000 square feet as compared to 53,000 square feet during the first nine months of 2007. 

Whom do they see struggling in the marketplace? 

Q: Who's really out there in the market right now and who's pulling back?

A: A lot of life insurance companies are on hold for the rest of this year. We've been told by them they are anxious to replenish their investment next year. They are on the side lines… We anticipate them coming back into the market. It would be awkward for us to go through and list them. Other than that we've been a wonderful borrower from life insurance companies. 

Same store sales: 

Basically we were up July and August and September was a tough month in terms of sales… There are a handful of retailers… that are essentially waiting to decide how much they're going to spend next year in terms of CapEx, kind of waiting to see what happens for the next three to four months. Some plans are on hold… In the better properties, demand is unabated. There are still people that are interested in coming into the better properties. 

Cap rates: 

Cap rates are higher. Loan-to-values are lower and spreads are wider and we've clearly seen all three of those moves in that direction over the course of the last six to 12 months. 

Questioning the popular data providers in the marketplace: 

There are a number of firms that monitor and report shopper traffic and occupancy at US malls. These firms issue releases and are interviewed by national media sources purportedly as industry experts on the topic. I would like to go on record and state definitively that we do not report any data to these firms. I believe that several other owners of high quality retail real estate assets also do not participate. Therefore, I leave to it your judgment as to whether or not their data is representative of the industry and certainly not us.

 

Comments

[billddrummer:]

Hi Judy,

This is exactly what I was looking for with respect to REIT performance.

As far as SPG, the company collects approximately $8.1 annually in rental income from CC. As you know, CC has begun inventory liquidation at 155 retail stores in the US. The company announced it is simultaneously 'aggressively renegotiating' leases on its remaining locations.

It appears to me that a firm like SPG would be unwilling to reduce lease rates on top-tier properties, simply because demand still exists for those spaces. With a 92+% occupancy rate, SPG has much more operating leverage and pricing power than a retailer like CC.

I'd look for overtures from CC to companies like SPG to be rebuffed. Whether that means that CC would then vacate the leases is an open question. They would become liable for damages as well as termination costs if they did.

The other alternative in this scenario is to have another retailer buy up the vacated leases if they are in good locations. BBY did that with 17 CompUSA leases earlier this year, and included the locations in the future store opening plans.

Conversion from one CE retailer to another is significantly cheaper than building a new store from the ground up. Another indication that the BBY upper management has superior strategies over other national CE chains.

As always, a pleasure to read your column.

All the best,

Bill

2008 Nov 05 04:06 PM