Simon Property Group Sees Leasing Surge as Traffic, Rents and Retail Demand Rise

Key Points

• Leasing demand remains strong: Simon Property Group signed more than 2,300 leases totaling over 9.5 million square feet in the first half of the year. New-deal rents rose 17% year over year, while tenant allowances fell 12%.
• Retail performance is improving: Occupancy was about 96%, shopper traffic accelerated to 3.4% growth in July and August, and comparable sales increased approximately 5.7% in the second quarter, with no material consumer pullback reported.
• Simon is investing in growth and digital initiatives: The company has $1.1 billion of projects under construction and plans to launch the Simon Media Network on Oct. 2, using its shopper data and more than 4,000 digital screens to attract advertising partners.

Simon Property Group NYSE: SPG said leasing demand across its retail portfolio remains strong, with management citing rising shopper traffic, higher retailer sales and continued interest from domestic and international brands.

At a company roundtable, Chief Executive Officer Eli Simon said the operating environment remains favorable as retailers prioritize physical stores. Through the first half of the year, the company signed more than 2,300 leases representing over 9.5 million square feet. About 27% of those agreements were new deals.

New-deal rent per square foot increased 17% from the prior year, while tenant allowances per square foot declined 12%, Simon said. The leasing pipeline was running more than 25% ahead of the pace reported at the end of the second quarter, according to management.

Occupancy, traffic and consumer trends

Simon said occupancy, which was around 96%, has room to increase. The company expects to end the year with occupancy above its level at the end of the prior year, while continuing to adjust tenant mixes and redevelop space.

“Our job is to choose the right tenant and the right tenant for that space, and then go to the next center and keep on doing it,” Simon said.

Management said consumer activity remained healthy through the back-to-school period. Simon cited comparable sales growth of approximately 5.7% in the second quarter. Shopper traffic increased 1.3% in the first quarter, 2% in the second quarter and 3.4% during July and August, he said.

Retailer sales and traffic gains were broad-based across categories, geographies and the company’s mall and outlet platforms, according to Simon. He said the company had not seen signs of a material consumer pullback.

Portfolio investment and redevelopment

Simon Property Group has about $1.1 billion of projects under construction with an expected 9% yield, roughly half of which involves mixed-use development. Management expects another $600 million of projects to begin by year-end, with a development pipeline exceeding $4 billion beyond those starts.

Simon said the company continues to pursue renovations, redevelopments, exterior-facing retail space, outdoor areas and new restaurant pads. The company’s strategy is centered on maintaining relevance at established properties through ongoing investment, he said.

Management also addressed approximately 1 million square feet of space it took back during the quarter, including former Saks space. Simon said the space was substantially re-leased or out for signature within about 90 days and characterized the situation as an opportunity to secure “really good real estate back” and re-lease it at higher rents.

Digital data and retail media efforts

The company is scheduled to launch the Simon Media Network on Oct. 2, according to Simon. The initiative is intended to allow brands to reach consumers using the company’s audience and data resources.

Simon said the company receives hundreds of millions of annual visits at its centers and records tens of billions of dollars in sales. He said recent interest in the media network has come not only from retailers but also from travel, leisure, airline, hotel and credit card companies.

Simon Property Group has more than 4,000 digital screens across its centers and is continuing to add screens, management said.

The company also discussed Simon+, its loyalty and app platform launched less than a year ago. Simon said the program has added millions of customers and provides data on shopping patterns across retailers, stores, regions and property types. Customers can earn loyalty rewards for purchases across participating mall retailers, in addition to retailer-specific rewards.

Chief Financial Officer Brian J. McDade said this first-party data helps the company make merchandising decisions, including grouping complementary retailers in similar areas of centers to improve productivity.

Capital allocation and international operations

Simon said the company expects to generate about $5 billion of funds from operations this year, pay roughly $3.4 billion to $3.5 billion in dividends, and produce approximately $1.5 billion to $1.6 billion of free cash flow. He said management expects to use capital for tenant allowances, operating capital, renovations and development while retaining excess cash flow.

On acquisitions, Simon said the company seeks assets that are “brand accretive,” offer opportunities to add value and are available at a fair price. He said management takes a long-term approach to owning high-quality retail real estate rather than making decisions based on short-term moves in interest rates.

Management also highlighted its international business, which Simon said represents roughly 10% of the company. The company is expanding outlet centers with partners in Korea, Japan and Malaysia, including projects at Gotemba and Fukaya-Hanazono in Japan, as well as developments and expansions in Korea and Malaysia.

Simon said cash generated by those operations is being reinvested locally and that some expansions could generate cash equity yields above 30%. McDade added that international relationships can support the company’s ability to bring brands from Europe and Asia into the U.S. portfolio.

About Simon Property Group (NYSE:SPG)

Simon Property Group, Inc is a self-administered and self-managed real estate investment trust that owns, develops and operates premier shopping, dining, entertainment and mixed-use destinations. Its portfolio includes regional malls, premium outlet centers and The Mills properties, serving consumers and retail tenants through a range of high-quality commercial properties.

The company generates revenue primarily by leasing retail and commercial space to national, regional and local retailers, restaurants and other businesses.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.