Simon Property Group (SPG), America’s largest mall REIT, is in the eye of the storm. On the company’s Q408 conference call, executives spoke of a rise in bankruptcies, delinquencies and vacancies. The company just sold off a mall in Cincinnati at significant loss. But SPG is upbeat and insisted it would be able to maintain ballpark cap rates, and is confident it can roll over $1 billion in debt coming due this year.
Square footage lost to bankruptcy in 2008 in our mall portfolio totaled 508,000 square feet as compared to only 61,000 square feet in 2007. During December we experienced some lost occupancy as a result of certain liquidations and bankruptcy lease rejections.
SPG says occupancy is fairly steady, but to conservatively preserve cash, they are joining other REITs in distributing 90% of the dividend payout in stocks instead of cash.
As noted on Simon Property Group’s Q408 conference call:
People that we are dealing with right now that are going to be opening substantial numbers of stores in our portfolio in 2009 include Forever 21, H&M, [Zara], Coach (COH), we’re still dealing with Express (LTD) and opening substantial numbers of stores, [inaudible], Sephora… The best of the breed retailers are going to take advantage of opportunities whether it’s Target (TGT), Kohl’s (KSS), Best Buy (BBY), Bed, Bath and Beyond (BBBY), none of these guys are out of business
Analysts question SPG’s confidence that things will look better in 2010:
In some instances we are doing short-term one year renewals because… We believe we’re going to have a better pricing market in 2010 then in 2009.
Q: At this point from your perspective even looking at deals going forward it’s not really moving the needle to the degree you would expect when you see these conference calls on retailers.
A: I would say long-term we’re more concerned about some of the bigger boxes then we are about some of the small shop tenants and in terms of what they present to the consumer.
Put it this way, it’s more important for [small retailers] results then it is for ours… We produce a lot more sales and we’re a lot more important to their success then they are to ours... Generally the small shop retailer does about 20% of their sales in our portfolio and as you can see the percent of rent, the highest is around 2% so you can figure the math out
SPG sees the downturn positively. No development means more opportunity and market share:
Currently we do not expect to begin construction on any additional new projects or major redevelopments in 2009… The new development business is dead for a decade.
Somewhat contradictorily, later in the call:
I do think there will be more obsolescence in this environment but I don’t think we’re in a five or ten year secular shift.
Just how bad (from WSJ):
"The market for malls is dead," says Dan Fasulo, RCA's managing director of research. "These properties are very capital intensive and without the debt markets it's impossible to make them work."
SPG says little financing is getting done:
The bond… market is not attractive to us right now… The banks are all trying to figure out what they’re cost of capital is and so… there’s not a lot of activity going on there. The [CMBS] market is defunct for the current time and our expectation is its going to stay that way for a while. So the one market that is out there in some sense of normalcy are the life [insurance?] companies and there is an appetite.
SPG on private equity:
Q: Private equity, is there any thawing in terms of interest in the real estate space from pension funds, other equity sources?
A: I would say generally US based by and large, no. International based, yes. I think the US based pension fund is tougher because of what’s going on either with their endowments or their retirees... They’ve got lots of things to worry about, hedge fund performance, private equity LBL performance, capital calls, commitments, retiree benefits, the poor performance, etc.
Q: And is that international interest in US assets?
A: Yes.
Not buying from General Growth Properties (GGP):
Q: The three Vegas assets that General Growth has, you are obviously a logical potential buyer of those assets, is that something you’re looking seriously at.
A: No.
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