The biggest mall owner in the US 'can't guarantee' there won't be more retail wreckage this year

Key Points
  • Simon Property Group is anticipating the pace of retail store closures will slow after a nasty start to the year, but its CEO won't make any promises.
  • The mall owner reported first-quarter earnings for 2019 and reaffirmed its outlook for the full year.
David Simon, chairman and chief executive officer of Simon Property Group
Patrick T. Fallon | Bloomberg | Getty Images

The biggest mall owner in the country is anticipating the pace of retail store closures will slow after a nasty start to the year. But its CEO won't make any promises.

"I think most of the bad news is behind us," Simon Property Group CEO David Simon told analysts on a post-earnings conference call Tuesday, referring to store closures and retail bankruptcies. "But I can't guarantee it."

Simon shares were down more than 2%, after the real estate investment trust reported first-quarter funds from operations — a closely watched metric in the industry — of $1.08 billion, or $3.04 per share, compared with $1.03 billion, or $2.87 a share, a year earlier. That was slightly below expectations, BTIG analyst Jim Sullivan said.

In February, CEO Simon said he was "nervous" about a few more retail bankruptcies shaking out during the first quarter. That was just before teen apparel retailer Charlotte Russe, personalized-gift company Things Remembered and Payless ShoeSource filed for bankruptcy that month. Now, more store closures have already been announced by U.S. retailers in 2019 than in all of 2018.

"It's safe to say ... we did anticipate some [of those] bankruptcies," the CEO said Tuesday. "We are looking at a few others. ... We will see how the rest of this year shapes up for them."

Mall vacancy rates, an effect of the closures, climbed during the first quarter to 9.3% from 9% in the fourth quarter of 2018, according to real estate research firm Reis. This is the highest vacancy rate the firm has tracked since the third quarter of 2011, when it was 9.4%.

Simon, in turn, has been on the forefront of adding new types of tenants to its malls in a bid to keep its shopping centers relevant. That includes taking some of its assets and turning them into "mixed-use" centers with apartments, hotels, office buildings and fitness centers. At Simon's Phipps Plaza mall in Atlanta, for example, it's adding a Nobu Hotel and a 90,000-square-foot Lifetime Fitness complex.

Earlier this year, Simon said it would partner with Ohio-based marijuana company Green Growth Brands to open 108 locations selling CBD products this year at its properties, including Roosevelt Field Mall in New York, and The Galleria in Houston.

"It's going to take some work this year to balance out," all of the retail store closures with bricks-and-mortar openings, David Simon said. He added that Easter traffic at malls was "slow" this year but he is "seeing some rebound."

The mall owner said sales per square foot during the quarter ended March 31 increased 3.1% from a year earlier to $660. It said occupancy at its malls and premium outlet centers was at 95.1%, up from 94.6% a year ago. Simon also reaffirmed its outlook for the full year fiscal 2019.

Simon isn't the only U.S. mall owner combating this recent wave of store closures. Others have been saying many of the closings in 2019 have been anticipated, and they point out that the closures come from just a few retail chains.

"A little bit of data parsing provides color to the nature of these closings," Washington Prime Group CEO Lou Conforti told analysts last week. "Six retail chains [account] for 73% of this year's closures, compared to 21% in 2016, and 27% in 2018, respectively. So more concepts aren't going under, just the s---y ones."

Simon shares are up more than 9% over the past 12 months, bringing its market cap to about $52.7 billion.

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